Penn-Central Merger and N & W Inclusion Cases

RESPONDENT:Penn-Central Merger Cases
LOCATION:Congress

DOCKET NO.: 433
DECIDED BY: Warren Court (1967-1969)
LOWER COURT:

CITATION: 389 US 486 (1968)
ARGUED: Dec 04, 1967
DECIDED: Jan 15, 1968

Facts of the case

Question

Audio Transcription for Oral Argument – December 04, 1967 in Penn-Central Merger and N & W Inclusion Cases

Earl Warren:

Number 778, 779, 830, 831, 832, 833, 834, 835 and 836, the Penn-Central Merger and N & W Inclusion Cases.

Mr. Trienens.

Howard J. Trienens:

Mr. Chief Justice and may it please the Court.

I’ve been assigned 50 minutes and I hope to save a few moments for reply.

Last term, the Court held the Penn-Central merger should not be consummated until the ultimate thing, the three railroads had — have been determined.

The Court stated that this meant a decision on the inclusion of these three railroads in a major system prior to the consummation of Penn-Central merger.

But the underlying reason for that holding was the economic fact that Penn-Central merger will destroy three other railroads, the Erie-Lackawanna, Delaware & Hudson, Boston & Maine.

The Commission expressly found that this would happen and since the case was before this Court, that finding has not been modified and has not been challenged by any party.

Now, the Commission has held that Penn-Central can be consummated and why, because the Commission has issued an order in the N & W Inclusion Case.

The Commission’s order directs Norfolk & Western to pay out some $130 million in stock and cash to acquire the equity ownership, not the properties but the equity ownership of these three railroads and to include them as separate subsidiary corporations in the N & W system.

Now the reason for the form of this order, I’m giving Erie as an example, is that N & W is required to buy the stock of Erie.

It’s not merged and it’s not integrated completely because merger was out of the question.As the Commission found, merger was nowhere in sight.

The reason it’s nowhere in sight is that Erie had $350 million of debt.

Everybody recognized that that made merger out of question, and the reason of course was that Erie bondholders who are appellants in this Court refused to do anything to modify that bond for that debt and they said they’d rather have Erie go bankrupt than modify the debt.

And so, we have these corporations.

N & W acquires their stock by going into N & W Subsidiary Corporation, separate corporations and if they fail to meet their fixed charges individually, they can go into bankruptcy.

It’s essential to us — compare what this order does for Erie stockholders but what it does for the Erie Corporation upon whom the Commission relies to provide necessary transportation service.

Now why is it that N & W is required to buy the stock of Erie for example.

Here is the public interest finding and I think it’s critical to read this because the District Court completely ignored its existence.

I can read the District Court opinion through and never know this finding occurred but this is why in the public interest, N & W was required to buy this stock, because it included — if Erie is included in N & W by way of control, control meaning we buy the stock.

These roads would be able to continue to provide adequate transportation service and why is that?

Because and only because of this express finding, the normal earnings of each petitioner, the normal earnings of each petitioner after inclusion will be sufficient to meet their fixed charges.

These normal earnings concept and these normal earnings findings are critical not only to the price we had to pay.

Price was geared to these normal earnings.

But it was also critical and underlies the Commission’s sole public interest finding as to why N & W had to acquire the stock.

And so I begin by describing how the Commission found and arrived at the so-called normal earnings of Erie railroad.

Erie had a deficit of $8 million in 1964.

It had deficits every year for years prior there to.

1965 and 1966, Erie reported net income averaging $5 million, deficits and net income 1965-1966.

The Commission took that $5 million of net income in those two years.

Howard J. Trienens:

It added $4.5 million which represented a subsidy that the New Jersey State was expected to and did commit itself to pay Erie to continue to run Erie’s — Erie commuter service and a subsidy in the amount of $4.5 million a year additional subsidy.

$5 million that they made in these two years plus the $4.5 million, that’s $9.5 million of normal earnings.

Now bear in mind, this isn’t a guess into the farthest in future.

This is a finding that Erie had achieved normal earnings of $9.5 million by the end of 1966.

Hugo L. Black:

But didn’t you say part of that was subsidy?

Howard J. Trienens:

Yes sir, and I don’t regard that if I have to buy a corporation that’s supposed to be earning $9.5 million, I think the fact that $4.5 million is a subsidy dependent on year-to-year appropriations of a legislature makes that a far different character of earnings, but that’s what part it is.

That’s $4.5 million of the $9.5 million is the subsidy.

Now, these past deficits were disregarded by the Commission and passed aside on the ground that Erie’s new management had achieved a sensational turnaround.

A sensational turnaround from all of these deficits now we’re earning $5 million and we’re going to get this subsidy, so it’s a corporation that’s going to earn $9.5 million a year, and that’s what N & W was sold.

Well, it’s been some turnaround.

It’s been a complete circle starting with this deficit of $8 million in 1964, Erie came up and earned an average of $5 million for 1965-1966.

But this year, Erie is losing money, it’s backed the deficits to the tune of $10 million a year.

For the first nine months of 1967, Erie lost $7.7 million, so it’s now in this year losing money, tuned about $10 million a year, that’s what its normal situation is now and this has been perfectly apparent since early 1967 long before the Commission decided this case.

Potter Stewart:

Is that after a subsidy from the State of New Jersey?

Howard J. Trienens:

Yes sir.

They — this reflects the realization of the subsidy they found would occur so 10 million is lost despite receiving that additional subsidy.

Potter Stewart:

The same — that same amount, 4.5 million?

Howard J. Trienens:

Yes, I believe so, yes sir.

That’s my — that’s what we’ve been told.

Now I realize that this function of predicting the future is a matter for experts and I know that when the weatherman says that it’s going to be a sunny day tomorrow, there’s no way I can dispute that, I have to leave that to experts.

But when the Commission’s finding of $9.5 million of Erie’s earnings is involved, we have to remember that this was not what’s going to happen tomorrow.

This was a finding that they had realized 9.5 million of earnings.

And this is the like the weatherman saying it’s going to be a sunny day all day today and failing or refusing to look out the window to see it’s already raining.

Now, an erroneous prediction under such circumstances isn’t a prediction at all and it’s not a mere error by some presumed foreseer.

This is an arbitrary action, arbitrary within the meaning of the administrative procedure.

To act on the premise that Erie has already achieved normal earnings of 9.5 million, when after receiving the subsidy, Erie is operating at a normal deficit, back to the deficit.

Now this becomes especially arbitrary when the same weatherman looked out the window in the Penn-Central case being decided at the same time and he found that it was raining on Penn-Central.

The Commission in the Penn-Central case decided the same time, refused to regard 1965 and 1966 earnings as represented in approving Penn-Central.

And the Commission placed great reliance on the 1967 reports which were before showing that there had been a decline in Penn-Central earnings.

Not a decline so that their aggregate was down to a deficit but a decline and they rely on that to support their approval of Penn-Central.

Howard J. Trienens:

So I say it’s doubly arbitrary when this weatherman will look at the window to see it’s raining on Penn-Central but still finds the theory, its normal earnings in $9.5 million was perfectly apparent to anybody to look outside that it is just isn’t so.

What position would you take if (Inaudible)?

Howard J. Trienens:

As to the Penn-Central merger itself, we’d take the position that under the mandate of this Court until a — the ultimate faith of these three railroads has been determined.

The Penn-Central shall not be consummated so that — I’m now talking about the Inclusion Case, I believe the Inclusion Case will reverse Penn-Central has to wait till they straighten this up.

Independently of that what the issue is —

Howard J. Trienens:

Independently of that I say Your Honor that if Penn — if the Inclusion Case were affirmed that the situation is now such that we know and allow — I shall demonstrate it as I get along that the affirmance of the Inclusion Case will not satisfy the mandate of the Court.

Even if that’s affirmed, the Penn-Central case mandate has not been satisfied because at least two of these roads and probably the Erie as well, the way it’s set up, will not have their faith determined.

You just won’t know.

Well apart from — whether it satisfies the mandate of the Court, what is your position on the merits of the Penn-Central merger?

Howard J. Trienens:

Well, if by the merits Your Honor, you mean whether we think —

You objected the merger?

Howard J. Trienens:

As such, no sir.

No sir, we objected the merger, the condition — we do not object to the merger itself.

We do object to the Appendix G conditions attached to it and what they do to the effort of other roads to survive, so as conditions and the effort to solve this problem, a problem created by Penn-Central.

It that can be so we — we think the benefits of Penn-Central in terms of efficiencies should be realized.

Byron R. White:

Mr. Trienens, does the Commission have the power to order the inclusion of the three roads in a — in another railroad?

Howard J. Trienens:

The power to issue an order directing them to do it?

No sir, no sir.

And I must say that the position of the Solicitor General, as I read it, the motion to affirm rest on that but it’s sort of attitude — well, don’t shoot the piano player, he is doing the best he can with this kind of a power that they had, this limited power they have.

Now the problem though, we don’t think risk on the Commission’s lack of power.

The problem is, what did they do?

The shambles that exist today and I don’t —

Byron R. White:

Well, in determining the faith of the three roads, if it was determined that if Boston and Maine for example is determined that’s its going to do it alone, (Inaudible) — it doesn’t have to be in either system to have its state determine, doesn’t it?

Howard J. Trienens:

That’s exactly correct.

However, there is one factor that makes that unrealistic from the Commissions point of view and that is the they’ve found that B & M cannot do it alone.

The finding is that they can’t survive as an independent railroad.

So that alternative has been foreclosed by the economic impact of Penn-Central.

So they can’t do it alone.

Why then do they not leave the first home that’s found for them?

And the reason is not the Commission’s lack of power.

Howard J. Trienens:

The reason in, what the Commission did do, this — allowing this Appendix G subsidy to enable these roads to shop around for inclusion in Penn-Central and they’re worth more to Penn-Central but it’s this Appendix G that creates an artificial climate that enables these roads to do that.

It’s that exercise of Commission’s power and not its lack of power that causes this problem.

Byron R. White:

Yes, but the — these three roads have an opportunity to be in another system and they have this on the terms that are argued to be or found to be equitable and fair.

Howard J. Trienens:

They have the opportunity to come into N & W on terms that are not only fair but I regard as generous to the excess.

But the reason they don’t want to come in is that they are worth more to Penn-Central.

After all, they provide the elimination of rail competition in New England.

They provide a savings that we can’t provide with them.

They are worth more to Penn-Central and what has given them the opportunity to continue to shop for that situation and to get more money out of this is two for one, the Commission’s failure to determine the ultimate faith.

In other words, they didn’t decide, it’s got to be N & W and not Penn-Central.

They refused to do that although I asked them to.

Byron R. White:

Yes, but the — do you think the Courts’ mandate then — if the — that the — that it must be finally decided what was going to happen to the two roads rather than it should be just firmly decided on how these roads are going to be protected?

Howard J. Trienens:

Yes sir.

I think, it’s — it said that till they found the — that for — finally decided the ultimate faith namely a home in a major system.

That’s the way I read it.

It’s what it says.

And it’s this — it’s the Commission’s failure to do that.

It’s the Commission’s failure to find that it ought to be N & W and not Penn-Central that lets them shop around with a subsidy to pay the stockholders.

Now bear in mind this Appendix G subsidy operates for the benefit of the stockholders.

If the re — traffic can just all vanish, Penn-Central can take all their traffic and under this condition, the stockholders of B & M can just shop to their heart’s delight for a better price.

This is the —

Byron R. White:

Would you — you objected to the merger at all if the Commission had found that the three roads should go into Penn-Central, no?

Howard J. Trienens:

We would have.

We would have objected that they’re going into Penn-Central was not in the interest of either the public or the remaining railroads.

But the Commission, by not deciding that one way or the other has left these railroads in a position where they can start getting in this indemnity pool at Penn-Central where they can keep shopping to get into Penn-Central and they can in effect frustrate this Commission inclusion order which they have done.

Byron R. White:

Well, the one road has already accepted, hasn’t it?

Howard J. Trienens:

One road has voted to accept, yes sir, one road.

Now when it came to N & W Inclusion Case and — we are the ones who are being asked to give 130 million for these railroads.

When it came to the N & W Inclusion Case —

Byron R. White:

Well, you agreed in advance to do that, didn’t you?

Howard J. Trienens:

We agreed in advance to do it on equitable terms and I’m — I will say to this Court that if Erie was a railroad earning 10 million a year, the price is right.

Howard J. Trienens:

We are not here challenging the price if in fact we are buying a railroad with normal earnings of 10 million a year but we’re not.

Everybody knows we’re not.

You can look outside and see we’re not.

The District Court avoided this whole question by saying, “Well, N & W doesn’t have to worry about the price because they get tax deductions”.

N & W gets tax deduction so they’re protecting their money.

All — in fact the more money Erie losses, the more we get to deduct from our consolidated tax return and we don’t have to pay as much tax out of N & W income, and in effect, the U.S. Treasury is protecting us in our payment to Erie stockholders.

So Judge Friendly said, “Well that cushion is to blow on you”.

Well, I don’t think it does.

I don’t think when we get a — or sold a $10 million profit making company and it turns out it’s losing $10 million, that that’s fair to N & W without regard to these tax scheme.

But it certainly doesn’t even begin to satisfy the whole public interest notion of this case that the reason it’s alright to put Erie and N & W and the reason it will survive Penn-Central is that it’s a profitable company making $10 million a year that will stay out of bankruptcy.

We now know that isn’t so, we know it isn’t so before Penn-Central hits even, and yet the District Court opinion in this doesn’t even face up to the sole public interest reason for forcing these railroads down to N & W’s unwilling throat.

Byron R. White:

But what benefit will approve of the Erie from being taken over (Voice Overlap)?

Howard J. Trienens:

Well, to Erie’s management, to Erie stockholders, they’ll get a great benefit.

They’ll get paid as though they are corporation or —

Byron R. White:

Well, what about —

Howard J. Trienens:

— income, (Inaudible) —

Byron R. White:

What about — while operating economies would have (Inaudible) as a result.

Howard J. Trienens:

The operating economies found a total, a million eight, 1.8 million a year.

That’s the magnitude of the operating economies found to accrue from this kind of arrangement for railroad already earning 10 million a year —

Byron R. White:

Was that what —

Howard J. Trienens:

— losing 10 million a year.

Byron R. White:

Is that what the ICC found?

Howard J. Trienens:

Yes sir.

And bear in mind, this is all before Penn-Central hits.

This is before the impact of Penn-Central.

And as our brief show, the Commission tried to say that wouldn’t — well, it will hurt Erie to the tune of 11 million, that wouldn’t — could be offset by some things that would benefit N & W but there isn’t any evidence for that, the brief show why that is and the reason is that Erie never claimed, there’s no evidence to support that notion.

Now, I’d like to turn if I may to a completely different point and I say this is completely different and to emphasize it, I want to now argue on the premise.

Totally wrong I believe, but the premise that everything the Commission did as to all three railroads was right.

Everything as to all three was right.

Earnings there, everything they found was true.

Howard J. Trienens:

The point I’m making now is that there is a separate issue because they sold these railroads to N & W as a package.

Both the public interest findings as to what they’d earned and the prices all assume that all three of these railroads are coming in as a package and this is critically important because these three railroads don’t go off in all different direction from N & W.

They are economically interdependent.

Interdependent is the finding of the Commission.

And Erie obviously depends on D & H and B & M for much of its traffic.

D & H’s primary function in life is to serve as a bridge between B & M and Erie.

The Commission’s public interest finding assumes inclusion of all three but the price is calculated on the basis of all three.

And this was a four-way control they call it.

Now, there’s no suggestion of this Court that B & M’s coming into the N & W under this inclusion order.

Now the thing that is remarkable is that this whole District Court opinion is constructed on the premise, the guess of the District Court that D & H was coming.

Now why is that critical?

The reason it’s critical is that what happens here really is that N & W was faced with an order that is a practical matter requires us to pick up Erie alone.

That’s really what this order does.

It doesn’t take care of B & M and D & H because they’re going the other way.

It requires us to take Erie who’s had this precipitous decline in its earnings.

There is no finding and I want to emphasize this as much as I can, there is no finding to support the inclusion of Erie alone in N & W.

The District — I’m not asking this Court to reanalyze all the Commission opinions and take my word, there’s no finding because the District Court said there was no finding.

I’m going to read the critical sentence of Judge Friendly’s opinion.

“While the Commission made no finding as to Erie’s losses in the event that D & H also were not included, rejection by D & H’s stockholders is so unlikely”, as we shall later show, “that we will not reverse on that ground, no finding to support Erie alone, but don’t worry about it, that’s not a practical problem because D & H is coming”.

Now this is something that the District Court says six separate times in its opinion.

We won’t reverse on this ground because Erie — D & H stockholders are so unlikely to reject, not even a serious possibility.

The Court says that this is not a hypothesis, even have a reality.

We cannot take the prospect of non-inclusion of D & H at all seriously.

We find ourselves unable to take seriously the possibility that D & H stockholders will reject their directors’ unanimous recommendation to accept the inclusion term.

It just isn’t a practical possibility and therefore, we can forget about the concern of N & W that here, they had an order, that’s a package and they’re going to take Erie alone because D & H is coming so found by the District Court.

It’s on this basis that the order is affirmed even though it didn’t have the finding to support inclusion of Erie alone.

Now this leaves N & W holding the bag as it were.

What if the D — District Court guessed wrong, we’re still stuck with the owner.

They affirmed it.

We get stuck with buying the interdependent Erie at the same price.

Howard J. Trienens:

No public interest finding in including Erie alone.

District Court holding, there aren’t sufficient findings but we’re stuck with the order.

And where — we were simply not saying one about the D & H vote because we knew that it took a two thirds affirmative vote of D & H to come in.

We knew that D & H’s principal stockholder who also happens to be its president had refused to say how he is going to vote.

Now we said that to this Court in our papers, the Solicitor General called our fears “mere speculation” based entirely upon a statement of D & H’s president made before, italicized before the D & H Board of Directors unanimously voted to recommend to the stockholders that inclusion terms would be accepted.

So the Erie comes along, the Erie whose loan inclusion in N & W is unsupported by findings as held by the District Court and they also ridicule our concern.

Here’s what Erie had to say last Monday in their motion to affirm.

N & W’s speculation that D & H and B & M may after all this time and effort elect not to become part of N & W appears highly exaggerated.

The inclusion of D & H in N & W is assured, assured.

D & H does not challenge the terms fixed by the Commission.

Its board of directors has voted unanimously to recommend to its stockholders acceptance of the terms proposed by the Commission.

Well, that was last Monday.

We received Saturday morning a letter addressed to this Court from counsel for D & H who had told the District Court upon whose — District Court relied that the D & H Board had unanimously voted to recommend these terms.

Here is the letter to the Honorable Sirs.

Earl Warren:

From both?

Howard J. Trienens:

This is from counsel for D & H to the Court.

First paragraph as set forth by the undersigned counsel to the District Court, the D & H Board of Directors voted on September 26 to recommend approval of the terms provided the Commission’s orders are held by the Court.

On November 29th, 1967, Mr. F.C. Dumaine Jr., a member of the D & H Board advised that Board that he is in the process of formulating an alternative proposal for D & H’s future and that he would not vote to recommend the N & W inclusion terms if when they are submitted to D & H stockholders, he is in a position to recommend an alternative which in his judgment is in the better interest of the stockholders.

Now this Mr. Dumaine deserves an introduction.

He is more than a member of the Board.

He is by far D & H’s largest stockholder.

He owns over 11-12% of their total stock and he’s eight times larger than anybody else in the Board or owners.

He happens to be their president and this is where we stand today.

The closing paragraph of counsel’s letter says that in view of Mr. Dumaine’s position naturally, the D & H Board reserves its right to reconsider its position in light of whatever alternative Mr. Dumaine may come up with.

Well, now this —

Earl Warren:

In other words, this — going to unring a bell?

Howard J. Trienens:

If this saws off the limb that the District Court claimed on.

This is the sort of embarrassment that was inherent all along in the District Court upholding an order on the ground that even though there is no finding to support Erie alone, “Don’t worry about it, there’s going to be a stockholder vote, D & H is coming in.

Don’t worry about it”.

That part is, there never was any reason for going out in this limb because D & H stockholder vote could have been required on a couple of weeks notice any time during this period.

Howard J. Trienens:

The Erie had theirs in August.

Anything inherent in this suggests that D & H didn’t want to take the vote.

Now of course D & H still wants this order affirmed.

I don’t want this — I don’t want –- be misunderstood.

Of course they want the order affirmed.

They want to get this price established, put a floor under their future negotiation with Penn-Central or whatever else they want to deal with.

Earl Warren:

Mr. Trienens, may I ask this.

Are we to be influenced by every time a stockholder, even if he is a principal stockholder, changes his mind about whether this is a good project or not when the board of directors which he is a member has voted to take a certain action and the Court has had to decline?

Howard J. Trienens:

Well, the answer Your Honor in two parts, first place, the D & H Board has now withdrawn.

Earl Warren:

I beg your pardon?

Howard J. Trienens:

The D & H Board has now withdrawn its commitment to recommend this to the stockholders.

Earl Warren:

Yes —

Howard J. Trienens:

But —

Earl Warren:

— but is done so after it — once approved it —

Howard J. Trienens:

That’s right.

Earl Warren:

— and the Court acted upon it.

Are we to be governed by that?

Howard J. Trienens:

Your Honor, I think that this Court should not be governed by that.

I think the District Court should not have been governed by that.

I think that when a Commission order is unsupported to require inclusion of Erie alone, and when N & W is at the mercy of the stockholder votes to take Erie alone, that that’s ground for setting aside the order and that the District Court should not have tried to predict based on the representations of the D & H Board been or in any other representations as to how the stockholders were going to vote.

But the way they avoided this mess, the way they avoided this speculation was to say that D & H should vote.

The D & H stockholders haven’t voted at all, just that the board has recommend it.

They said one time they recommend one way and that was withdrawn then.

They should have made the D & H stockholders vote.

That would have avoided the lower court having to have rest in its decision on its guess as to how two thirds of the stockholders would have voted and they haven’t voted yet.

They haven’t voted yet and speculation on my part, on the lower courts part, and on anybody’s part as to how they will vote.

All I see —

Earl Warren:

Well, what — my only point was, are we to be influenced in anyway by what stockholders think now but what is not in the record.

So, if we do, why — we — I suppose we (Inaudible) —

Howard J. Trienens:

No, I —

Earl Warren:

— have any finality to it, but I now wonder why this letter is here before us.

Howard J. Trienens:

The reason this letter is here before you I believe sir is that the District Court improperly in my view having relied upon some resolutions of the board of directors, decided the case on the basis of that reservation — basis of that recommendation and bear in mind this is at the critical point where the Court said, “We will not reverse because the D & H Board did such and such”.

We think that was improper.

Abe Fortas:

Are you reading the mandate of this Court as requiring the — that there be some provision made for these three roads acceptable to those respective roads —

Howard J. Trienens:

No sir.

Abe Fortas:

— instead of some mandate, instead of some provision made for — which would give them a reasonable prospect of inclusion in one of the systems, is that right?

Howard J. Trienens:

No sir.

Abe Fortas:

Well, are you arguing that this provision that was made for inclusion of the D & H was inadequate, unsatisfactory, unreasonable or what?

Howard J. Trienens:

I am now arguing on the premise which — and I attack the D & H price is too high, I think it’s much too high.

But let’s assume the price was equitable for inclusion in N & W.

The Erie is forced in N & W on the premise that D & H is coming.

Abe Fortas:

Well, let’s stay, if you don’t mind, I’d like to stay with this letter that you’ve read us which I haven’t seen.

What difference does that make?

Howard J. Trienens:

The —

Abe Fortas:

What difference does it make whether Mr. Dumaine or anybody else says that they didn’t like the proposal made for inclusion of the D & H in the N & W system.

What difference does it make —

Howard J. Trienens:

The diff — the difference I suppose —

Abe Fortas:

— in terms of the issues before this Court?

Howard J. Trienens:

This Court is here reviewing not only Penn-Central but the D — the Inclusion Case, the validity of the inclusion order.

This makes the difference in this critical sense.

The order requires that N & W take Erie all by itself.

If everybody says go away, we are stuck with Erie alone.

There is — are no findings to support that order.

Abe Fortas:

Well, I’m talking about this letter.

Howard J. Trienens:

Yes sir, yes sir.

Abe Fortas:

Now will you please —

Howard J. Trienens:

Yes sir

Abe Fortas:

— tell me about this letter.

Howard J. Trienens:

Exactly.

There are no findings to support the inclusion of Erie alone.

Howard J. Trienens:

Now, why did the District Court say that it would uphold this order in the lack of findings?

The District Court brought in the prior advice from this same board of directors to say that not withstanding the lack of findings as to Erie.

And not withstanding the fact that we would reverse on that ground we won’t do it because the D & H Board has voted to recommend approval.

It’s the District Court that relied on the action of a D & H Board which I think it shouldn’t have done, but which it did six separate times in its opinion and said it would have reversed if it hadn’t have done it.

Abe Fortas:

But what you’re —

Howard J. Trienens:

And now, having relied on that foundation, this letter pulls the foundation right out from under.

Abe Fortas:

What you’re saying is that the District Court’s conclusion dependent upon the consent as it saw — out of the D & H Board.

Howard J. Trienens:

Exactly.

Exactly and I cite pages 57, 59, 61 and 66, 67 as expressively and explicitly basing their decision not to reverse on the action of the D & H Board, action which is now been pulled right out from under that opinion.

Abe Fortas:

Are — you’re saying that that was the only basis that the District Court had as shown by the record for concluding that the inclusion of the D & H in the N & W system was appropriately provided for.

Howard J. Trienens:

No sir, no sir.

This comes in a chain reaction.

It’s the Erie, that we sold the Erie as a part of a package, is a part of an — as an interdependent road as part of a package.

In order to sell us the Erie, they had to produce the D & H under the findings and analysis of the District Court, Erie alone was not supported by finding.

So it’s the — the thing at issue was the Erie.

It’s the Erie inclusion that’s at issue.

And the Court says, “We would reverse for lack of findings but for the recommendation of the D & H Board that D & H is coming, so you don’t have to worry about getting just the Erie, D & H —

Hugo L. Black:

But is that the exact language, “but we would reverse?

Howard J. Trienens:

Well, when it comes to exact language, I’ll read the sentence Your Honor.

“While the Commission made no finding as to Erie’s losses in the event that D & H also were not included, rejection by D & H’s stockholders is so unlikely, as we shall later show, that we will not reverse on that ground”.

And the — as we shall later show — I’m reading from page 61.

The “As we shall later show” comes on page 66 where the Court says, “We find ourselves unable to take seriously the possibility that D & H stockholders will reject their director’s unanimous recommendation to accept the inclusion terms”.

Hugo L. Black:

You are saying if you had a condition of an approval and that the condition has failed?

Howard J. Trienens:

We are saying that we had an order that was not conditioned.

We’re stuck with the order.

There’s no condition in the order.

But it was unsupported by findings as to taking in the Erie alone and they said it was unsupported by findings.

We would reverse on that ground, but for the fact, you don’t have to worry, D & H is coming anyway and how do we know because the D & H Board just voted to recommend it.

Hugo L. Black:

They didn’t quite use the language if they would reverse, do they?

Is that — you read them (Inaudible)?

Howard J. Trienens:

Well, they — the sentence is — and word — I’m in the summarizing paragraph.

While the Commission made no finding as to Erie’s losses in the event D & H didn’t come, in other words, the Court does find as a — the base of their analysis of this order that the Commission made no finding —

Hugo L. Black:

Where is that?

Howard J. Trienens:

This is page 61 Your Honor.

Right after the two summarized sentence.

There is no doubt, no question about the fact that the District Court held that the Commission had made no finding as to the Erie situation.

And then it says, “We will not reverse because D & H is coming anyway,” and how do we know, because their board voted.

Potter Stewart:

Mr. Trienens, did the Commission make any finding about the — based on the possibility that the Erie and D & H would come but the Boston and Maine wouldn’t?

Howard J. Trienens:

Well, here’s the finding they made and it’s at 840 of the Commission’s opinion.

This is the finding on the assumption which we now know as shaky to say at least that Erie and D & H, that’s the question.

That Erie and D & H are coming but what about B & M.

This is the Commission’s whole treatment of that subject, sole treatment.

If B & M were not controlled by N & W, but remained an independent carrier, the net reduction in Erie and D & H annual gross rate revenues would no doubt be greater, greater than we found.

The record does not permit any reliable estimate of the increased loss.

Potter Stewart:

No, how did the District Court treat that?

If it would have reversed for lack of a finding about the D & — about the D & H except for the board’s action, why wouldn’t nobody reverse for lack of a finding on —

Howard J. Trienens:

The reason —

Potter Stewart:

— D & H?

Howard J. Trienens:

But the reason as I see it is that the —

Potter Stewart:

So what did it say?

(Inaudible)

Howard J. Trienens:

What it said in that instance was that there was sufficient evidence to show that this wouldn’t make that much difference.

This is on page 57 of the report.

Even —

Potter Stewart:

So the lack of this finding didn’t make enough difference in the District Court (Voice Overlap)?

Howard J. Trienens:

No and that’s — but what happened there was that the District Court and now you have the Solicitor General and Erie, all trying to supply findings.

The Commission found that the loss would be greater and that the record wouldn’t permit an estimate of the increased loss.

Now, you’ve got the District Court and the Solicitor General and the Erie and D & H as a matter of fact, trying to have this Court as they have the District Court make findings that the Commission refused to make.

Now this — the complete answer to that is that this is a sentence out of Champlin Oil case, 341 U.S. 301.

It’s not the function of the Court to rescue the Commission by making findings de novo which the Commission itself was unable or unwilling to make.

Howard J. Trienens:

Now they’ve tried to rescue the Commission by making findings where the Commission not only didn’t make them but they found the record did not permit them to be made.

Now, where it also attacked that N & W didn’t put in the evidence.

Well, N & W agreed with the evidence and the Commission’s finding that these were interdependent roads.

Why should we be impeaching that Commission finding?

These people are not — the package having been broken, these people are now trying to rescue the Commission by making findings that the Commission didn’t make and on a subject which the Commission said, the record does not permit any reliable estimate.

That’s the situation as to that one but that’s — and that’s how they got out of it, if you — they got out of it.

Earl Warren:

So, who have the burden of showing what the law should be?

Howard J. Trienens:

Well, — what?

I would think that since these roads were trying to get into the N & W system, they have the burden in showing what their value was to the N & W system and the Commission treated that on the premise that all four — I mean all four, N & W plus the three would be a package.

All of these findings, all these calculation, all these prices are calculated on that basis because — and why do they do it there because they are economically interdependent.

They connect.

One is a bridge between the other two.

We agreed with that, we agreed with that.

If you’re going to take them why take the — why take pieces of the package.

So we did not feel that it was our burden to come and show the situation as to particular pieces of the package.

We did put in evidence.

In contrary to what the Government says, N & W is the one that put in what the Commission regard as a careful and detailed study of the losses, but it was the losses of the package, we — whether we have the burden or not, we did it as a package.

And you really have to search in vain in support, to see any contemplatio that they’re going to break this package.

I cite the sole sentence to Mr. Justice White but that’s all there is in this whole report, that one sentence that the record doesn’t permit.

I also want to add one comment about that Commission finding.

It starts out, if B & M were not controlled by N & W but remained an independent carrier, well, that’s one premise that I don’t think we can operate under.

If B & M remained an independent carrier, that all reason we’re all here, the whole reason that Penn-Central creates this problem is a finding that that is not in the cards, that the continued the operation of B & M as an independent carrier is out of the question foreclosed by Penn-Central.

Now the District Court ridiculed our worry, that all — well, these roads may drift into Penn-Central and Penn-Central would not only have the East but with all these roads besides.

I’d like to remind the Court that this concern has reality.

Last year, the Central New Jersey argument and you might inquire where is the Central New Jersey today, well, it went bankrupt.

And don’t they have counsel?

Yes, they have counsel.

Why aren’t they here?

The reason they’re here is that they made an agreement with Penn-Central.

The eve of this District Court hearing that if Central New Jersey would stay out of this case, Penn-Central would agree to take them in.

Howard J. Trienens:

Penn-Central made the same offer to Reading and it’s that availability of Penn-Central as a home that keeps these folks going outside of N & W knowing that they’ve got this Appendix G subsidy.

Now back of all these, you’ve got to remember, there’s this Appendix G pool that enables these stockholders to lose all their traffic and not be concerned about it because they are protected by the indemnity pool and that’s what permits this whole thing to happen.

Now, I’d to like to close by simply stating that last term, the Penn-Central case has held that that merger was the largest railroad merger in our history and if not handled properly, it could seriously disrupt and irreparably injure the entire railroad ystem in the northeast section of the country.

The reason that I’ve tried to outline and — which are covered in our brief, we don’t think that this has been properly handled in the sense that the Commission’s action is arbitrary and unsupported within the meaning of this administrative procedure and I realize that the Commission has the responsibility for administering the railroad merger provisions of the Interstate Commerce Act.

I realize that full well but I also say that the courts have their responsibility to assure that the administrative action complies with the standards of the statute and to protect against arbitrary action.

The Congress has directed that there would be effective judicial review and we believe that the standards of the administrative procedure have to require that the Commission’s orders in this case be set aside.

Thank you.

Earl Warren:

Mr. Isaacs.

Myron S. Isaacs:

Mr. Chief Justice, may it please the Court.

I speak for the appellants in Numbers 830 and 831.

Oscar Gruss & Son holders with affiliates of over 14% of the first mortgage bonds of the New Haven railroad and the committee representing the first mortgage bondholders of the New Haven.

The New Haven has been bankrupt since 1961.

The bonds have been in default, $77 million is the approximate principal amount, $98 million that are claimed today.

These are bonds that were issued in 1947 with the approval of the Interstate Commerce Commission in the last three organization of the New Haven.

They were issued along with about over $200 million of income bonds, preferred stock, common stock that were supposed to be comparatively the risk securities.

Divisional bondholders of the New Haven then who had bonds with longer, with their higher interest rates and shorter maturities were required to take these first mortgage bonds that would — of such high quality, marketability, coverage of interest, and everything else.

Well, they went into default 1961.

The trustees who are appointed in the reorganization intervened in the Penn-Central merger proceedings in 1962.

They sought a complete inclusion of the New Haven in the merged Penn-Central to be required by the Commission as a condition precedent to consummation of the merger.

The position of the Penn-Central at that time were opposed that they suggested an operating agreement, they would take in the operations of the Penn-Central for a period of — by 10 years was suggested.

The idea was that they could realize the same savings of about $5,200,000 a year that the trustees had shown would result from inclusion of the operations by a complete transfer of the properties.

Well, after those briefs have been filed, they came to agreement, the New Haven trustees and the Penn-Central management.

They agreed to a sale of all the New Haven properties to the Penn-Central.

The trustees would try to abandon the passenger operations.

The — they would receive some day a price which Penn-Cetral was willing to pay.

In return, the trustees themselves would use their best efforts as trustees to see that the proposed price was approved by the Commission and the reorganization court was consummated.

And the New Haven trustees also have made the specific agreement to limit any statements they might make in the merger proceedings, any documents they might file even in the merger proceedings or in review proceedings such as this, so that their statements and their filings would be consistent with the provisions and intent of that agreement.

That agreement has created some very substantial conflicts of interest between the commitments of the trustees to Penn and Central and the interest of the state in which they are fiduciaries.

The Commission came to its first decisions in April of 1966.

And the New Haven abandonment of passenger service case, they denied the right to abandon most of the passenger trains.

Myron S. Isaacs:

In the Penn-Central merger case, they approved the merger of Penn and Central subject to certain conditions affecting various railroads.

As far as the New Haven was concerned, the Commission made the specific finding that without complete inclusion of the New Haven, the Penn-Central merger would not be consistent with the public interest.

That finding made in April of 1966 was repeated again in the November 1967 report.

The condition however that the Commission required was not the inclusion, actual inclusion.

It was a commitment of Penn-Central to include the New Haven operation someday on terms to be approved or proposed by the Commission.

Until after the entry of the order of the court below until after this appeal — these appeals have been docketed, the Commission had never dealt on the merits with the position of Gruss that there cannot be any reasonable assurance of actual inclusion or any actual inclusion on fair and reasonable terms unless the operations of the New Haven are taken over concurrently with consummation of the merger of Penn and Central.

Now, its — this is a very important difference.

It’s one thing to keep the New Haven alive by loans as far as the constitutional rights of bondholders are concerned, this means a continued erosion and eating up of their property.

On the basis of the November 1967 report of the Commission, the entire price that would be paid by Penn and Central, the Commission approved where Penn and Central was willing to pay, would give the New Haven trustees for the first mortgage bondholders, either $50 million if you can value the Pennsylvania Railroad stock at the speculative price that’s fixed by the Commission of 8750 a share or on present market value, you’ve got $20 million left for the first mortgage bonds.

Let’s assume that you have an immediate inclusion today or as of August 31, 1967.

With everyday that passes, every month, every year, the — what’s left for the first mortgage bondholders is less and less.

It’s eroded in two ways.

One is just by the operations, the New Haven trustees don’t pay all — don’t pay any taxes really.

They keep accumulating.

They don’t pay rentals, most of their rentals for railroad cars and their other administration expenses that reflect the erosion of basic position in a decline of assets that are leftover for the first mortgage bonds, a deprivation of property that the extent that it isn’t absolutely necessary as utterly without due process of law.

And secondly, you have the enhancement of that deprivation of property both by the refusal to prevent abandonment of passenger service and now by the refusal to provide for inclusion at the time you consummate the merger.

There are a number of areas of specific constitutional rights that the Commission in the court below just completely disregard.

One is the right under decisions of this Court, Railroad Commission of Texas against East Texas at what — one of them — the right to — the owners of a railroad property if they cannot operate it on the basis of a reasonable return, they have a right to abandon operations and to take the salvage value that they have.

This is a right which the Commission is prohibiting in the name of the public interest in keeping the New Haven alive.

These are loss operations which the Commission recognizes, will continue to be loss operations as long as they kept separate for Penn and Central.

This right to stop the losses and take the salvage value is a vital right which is being denied that — of the first mortgage bondholders.

The second right is the one involved with the — this Court’s decision in the St. Joe Paper case.

Before you can have properly a bankrupt railroad included in another railroad, you have to give the owners of the equity, the bondholders in this case, the right to vote on the inclusion.

This has attempt to force inclusion without giving bondholders anything to say about it, without letting the bondholders as security holders know what is in store for them if the Commission price is approved.

And finally, you get the general attempt to force a transaction which will leave bondholders with far less than the amount of their claim, again, without a vote in violation of the decision of this Court in the Radford case and the requirement of a balancing of public and private equities in the Denver & Rio Grande case.

Once this merger is consummated with the erosion of the New Haven continuing, there will be no more power either in the Commission or in the courts to protect the property rights of bondholders.

The bondholders are in a position of seeing their property disappearing no matter who contests what is done by the Commission and the courts.

If you assume the current price which cuts out all junior bonds, which cuts out all of creditors other than bondholders, you’re going to have litigation by those classes regardless of what the first mortgage bondholders do and during that litigation every month and every year it goes on, you have a decline in the property that is left for the first mortgage bonds, an erosion of their property.

On the other hand, if you have the courts responding to the appeals from the Commission order and requiring an increase in price, then the same erosion can be had at the option of Penn-Central.

They can litigate forever while the bondholders bear the cost, while the property of the New Haven disappears.

Myron S. Isaacs:

And there is no way of compelling them to stop or compelling the losses to stop except by having the Commission do what its public interest findings require it to do.

To have the New Haven included when you have Penn and Central merged.

It is —

Abe Fortas:

Well, Mr. Isaacs.

Myron S. Isaacs:

— wholly feasible to do that.

Yes.

Abe Fortas:

Mr. Isaacs, is —

Myron S. Isaacs:

Yes sir.

Abe Fortas:

— aren’t you confronting us — this Court with a dilemma that I suppose the Penn-Central offer — made an offer to New Haven, suppose that were approved by the ICC and the District Court, and suppose the New Haven rejected the offer by either the New Haven or some appropriate class of security holders, I suppose it would follow from what you say that the — hence — that — they just have to keep that process up until something were done that was satisfactory to the New Haven, the trustees and the appropriate class of security holders or that the Penn-Central would have to lease the New Haven road and operate it on a lease basis and even that would assume that the terms of the lease would be accepted by the New Haven, wouldn’t it?

Myron S. Isaacs:

If you had a final solution by lease, that would — there would be some either acceptance by New Haven or crammed down by the courts.

I think the dilemma would be satisfied in this — or avoided in this situation if you have inclusion on an interim basis now.

It would seem to me that if you start with inclusion — by a lease if you will, by a lease with the term — with the read terms to be fixed later, by a conveyance with the price to be fixed later, by an operating agreement with — that as long as you have the immediate takeover of the operations by the Penn and — by the merged Penn-Central, it’s my judgment that you could leave the fixing of terms to a later process.

You would’ve —

Abe Fortas:

But then who would be —

Myron S. Isaacs:

— stopped the —

Abe Fortas:

Who would be at whose mercy?

Myron S. Isaacs:

I don’t —

Abe Fortas:

Do you think that would (Voice Overlap) —

Myron S. Isaacs:

— and nobody would be at anybody’s mercy at that point.

The — everybody would have the right to argue about terms if Penn-Central were so advised.

They are not blocked from arguing that the losses that are — they incur — if they incur any losses should be subtracted from the price.

They’re not stopped from arguing anything that they maybe advised to argue by the fact of immediate inclusion.

The bondholders are in an entirely different situation.

They are at the mercy of people on both sides of them.

The junior securities of the — the junior bondholders of the New Haven and the other creditors of the New Haven under one hand and Penn-Central on the other, they are boxed in and squeezed and unable to have court attention, court review that is meaningful of their claim of right.

Abe Fortas:

Well, they’ve either got a great deal of power or not quite enough power?

Myron S. Isaacs:

They’ve no power at all, Your Honor.

Abe Fortas:

(Inaudible)

But the concept and situation of this sort of absolute equality of bargaining power, sort of boggled my imagination.

Myron S. Isaacs:

I’m not suggesting that we could hope to have power equivalent to that at Penn-Central, we can’t and don’t.

Myron S. Isaacs:

But we should have the limited power not to be boxed in, in a situation where we have no control over the continued desperate erosion of our equity.

The bondholders are in a unique — that the first mortgage bondholders are in the unique position here of having people who — to whom further erosion means nothing, able to litigate and expose the errors of the Commission.

On the one hand, and if they are correct in having the Penn-Central able to do it and no matter who’s doing it, this erosion continues indefinitely under the Commission decisions.

It is an erosion which practically can be stopped.

The Commission can see that the word, the findings of the Commission are upheld, that are matched by actual transactions if you have inclusion taking place at the time of the merger granted that there is a theoretical possibility of the inclusion being something less than permanent.

It still — there still will have been inclusion and the chances are that it will be permanent that the claims of right will be finally resolved without the kind of hammer that’s over the head of the bondholders today.

I don’t think that the dilemma is realistically a serious one but the dilemma of the bondholders is really an impossible.

It is not only the bondholders it’s also the reorganization court.

The Court on July — in its July 11 opinion, requested bondholders to apply to the Commission for immediate inclusion by way of a lease so that at the time of merger you would have a cessation of the drainage away of the estate.

The request was made by its order of August 1, the Commission seemed to be saying until the court below that it was saying that it has set up a machinery for the operations of the New Haven to be included as soon as the merger takes place.

That machinery has now been abandoned.

The Commission hadn’t decided completely apparently whether to abandon at the time the Court made its decision, the Court took the intentions of the Commission as a substitute for action by the Commission to see that the inclusion takes place.

At this point, by the November order, the Commission has abandoned and has left the bondholders and the Court in an impossible debate, nobody controls Penn-Central.

And once, except the Commission, the Penn-Central is not a party to the proceeding before the reorganization court.

And unless this Court acts, it will be impossible to have inclusion at anytime on any kind of fair and reasonable terms.

Thank you.

I would like to save the balance of the time allotted for rebuttal by Mr. Migdal.

Earl Warren:

Mr. McDermott.

Edward A. McDermott:

May it please the Court.

I’m Edward A. McDermott and I appear for the Boston and Maine Corporation in this case.

Boston and Maine is a New England carrier and is one of the protected roads referred to in Penn-Central.

Its service has been found by the Commission on two recent occasions at least to be essential and necessary to public interest.

Now as the eastern railroad merger pattern began to evolve, it was apparent that the eventual inclusion of Boston and Maine in a larger system was desirable and necessary.

Boston and Maine together with Erie-Lackawanna and Delaware and Hudson sought inclusion in the Penn-Central merger in early 1963.

That petition was denied in April of 1966 without prejudice to refiling under conditions prescribed.

At the same time that B & M sought inclusion in Penn-Central, it also petitioned for inclusion in N & W-Nickel Plate.

Erie-Lackawanna subsequently withdrew from that proceeding leaving no connection for B & M with N & W and B & M’s petition was again denied buthere with an Appendix O provision with which this Court is familiar.

N & W proceeded with consummation of its unification with Nickel Plate and other roads and began reaping the financial rewards of that enlarged union and B & M sought negotiations for inclusion in that system.

Discussions with N & W summarily aborted with the Dereco announcement and the take it or leave it position by N & W.

In this situation, and since the Dereco offer unattractive as it was, was subject to a long chronicle of conditions precedent.

Edward A. McDermott:

B & M’s petition under Appendix O was necessary and was promptly filed.

In that petition, B & M sought merger into N & W and its testimony and its studies and its evidence of value were based primarily on merger.

Oh, important to an understanding of the Commission’s action with reference to B & M in the N & W case is knowledge that N & W’s attitude toward the properties of B & M as evidenced in that hearing.

In response to a direct question from Commissioner Webb, the principal policy spokesman of N & W replied that he did not know whether N & W would want B & M if it were required by the Commission to accept Erie and D & H.

Again in final oral argument before the full Commission in response to a question from its chairman, N & W counsel responded that N & W would just assume — see B & M go into Penn-Central or remain outside N & W as far as N & W is privately concerned.

And N & W went even further.

It told the full Commission that as far as equity to N & W was concerned, D & H might as well go into Penn-Central along with B & M.

It said, “There is no economic justification for an E-L, D & H, N & W system”.

Now N & W clearly and intentionally created the impression.

It had no real interest in B & M.

B & M intervened in the D & H appeal to the inclusion order to the statutory court.

Its position there as it is here, is that the Commission committed error in fixing B & M’s value as a wholly owned subsidiary of N & W because it failed to credit B & M properly with the savings and traffics gains its inclusion will bring to N & W.

Abe Fortas:

Mr. McDermott, I am not entirely sure that I clearly understand the position of B & M here.

Are you asking that we affirm except on the valuation point?

Edward A. McDermott:

That is correct sir.

Abe Fortas:

Except for valuation, you’re —

Edward A. McDermott:

As to B & M.

Abe Fortas:

Yes, and you’re asking that we consider valuation at this time and that we remand with respect to the valuation point.

Edward A. McDermott:

That is correct Mr. Justice.

Abe Fortas:

But otherwise that we affirm the order below.

Edward A. McDermott:

That is correct.

We support the entire balance of the order.

Now B & M’s position in the District Court and here is that a fair in equitable terms for its inclusion in N & W cannot be found on the record and Commissioner Webb suggested they could not be.

Then B & M’s petition should be denied and it should not be foreclosed from seeking a haven elsewhere.

A brief word must be said about B & M and its attitude toward the Penn-Central proceedings.

In approving that merger, the Commission after rehearing has provided traffic and indemnity provisions which has revised are acceptable to B & M, and afford the interim protection it requires.

B & M did not participate in the earlier appeal to this Court to stay Penn-Central for several reasons.

It was of the opinion then and it’s of the opinion today that only with consummation of Penn-Central will N & W which to this point has been successful in accomplishing delay have the economic incentive to deal fairly and expeditiously to include B & M as an element of its system.

Also, at the time of the appeal to this Court in the last instance, B & M had assurance by the Commission that hearings would be held on B & M’s request for strengthened interim protection.

And finally, because of its location, B & M traffic is less susceptible to diversion to a merged Penn-Central than E & L and D & H traffic.

Edward A. McDermott:

And because it has afforded this protection, B & M felt that on balance, the public interest called for consummation.

B & M supports consummation of Penn-Central provided the Appendix G conditions are upheld on this appeal and it is an appellee before this Court in that proceeding.

But the N & W system is our first concern and our primary concern.

N & W with a facility often demonstrated over the years of these proceedings had suddenly and dramatically changed the emphasis to suit its purpose.

B & M is apparently no longer the unwanted step child that was pictured to be by N & W before Hearing Examiner Webb and the Commission.

Suddenly B & M is the tail that wags the dog and if B & M finds the prescribed terms of inclusion unfair and inequitable, the whole Inclusion Case must fall.

This is clearly not the case as appellees arguments will develop.

I call again the Court’s attention to a statement by the statutory court that relates to a question asked by Justice White.

With reference to B & M’s non-inclusion, statutory court stated at page 61, to summarize, there is a sufficient finding supported by adequate evidence that B & M’s non-inclusion would not undermine the fairness of the term set for the inclusion of Erie-Lackawanna and Delaware and Hudson.

N & W’s representation to this Court and to the court below that B & M no longer regards itself as a prospective affiliate of N & W although often repeated are without foundation.

I repeat again as we state in our motion to affirm, B & M seeks inclusion in N & W on fair and equitable terms.

If it does not succeed in that effort, B & M would be willing to attempt to negotiate terms for its inclusion in the N & W-C & O system even though B & M realizes that their proposed merger faces serious problems and that N & W’s Chief Executive Officer has termed the N & W-C & O proposal to B & M as a take it or leave it proposition.

Only if both of those possibilities fail will B & M turn other alternatives to ensure a continuation of its essential services.

B & M submits that the N & W — that in the N & W Inclusion Case, the Commission based its essential findings as to the public interest on important substantive findings that under N & W control, petitioner including the Boston and Maine will be able to achieve substantial savings.

It found that the petitioners as well as the public will benefit from unified management of what is now several companies operating independently.

And to quote, the Commission had found that among others such benefits will include joint routes of affiliated lines.

The prospect of single line service, elimination of interchanges, improved schedules and more flexible distribution of equipment, with that one exception, B & M did not receive credit for the savings achievable through the unifications which the Commission found would occur.

B & M received credit for it but one element of savings, the consolidation of traffic solicitation forces with an annual value of $328,000.

Now since the Commission clearly rejected, petitioner’s witness wires assumption that the opportunity for savings under control would be so limited.

We submit it acted arbitrarily in basing B & M’s value on those limited sales.

In the context of this case, $328,000 a year in annual savings can hardly be regarded as substantial.

The four-way merger saving studies which were introduced by the same witness wire for Erie, D & H and B & M went unchallenged by N & W.

B & M’s allocable share of those savings exceeded $3 million.

The $3 million annual savings obtainable upon complete integration of B & M’s operations into N & W are substantial and afford a measure of the amount of B & M contribution to savings actually attainable when the managements of these four roads are unified and the operations integrated.

Equitable terms must reflect but B & M will contribute to the enlarged N & W system.

That was a holding of the Schwabacher case.

B & M’s value cannot be determined fairly unless consideration is accorded, its savings contribution to the new system.

The economic consequences of the Commission’s failure to do so should not be imposed on B & M by application of the doctrine of administrative finality.

Now as a consequence of this failure to properly credit B & M with its contribution, an exchange ratio was proposed for B & M of one or ten which would result in a reduction of more than a hundred and three million dollars below its book value.

From $114 million to $10.8 million and it —

Earl Warren:

Is the value — was the value of B & M contested?

Edward A. McDermott:

Yes, it was the — it would be fair to say it was contented.

Earl Warren:

Whose figures did the Commission exempts?

Edward A. McDermott:

The Commission, as to B & M, accepted figures in the record submitted by a joint witness for the petitioning railroads.

Based on savings resulting from a form of control that was very different than the Commission found would be the type of control N & W would in fact exercise to meet the public interest requirement in their finding.

Earl Warren:

Was there any evidence to contradict that?

Edward A. McDermott:

Well, there — yes there were — so-called four were — four way merger study introduced which reflected substantially the types of unifications of management that the Commission details in its finding and in its order in which it says N & W can accomplish under control.

Our position is Mr. Chief Justice that if the Commission has found that this is the type of unification that is going to result and it has so found, then we should be credited fairly with the contribution that B & M will make to a system operated in that manner.

Earl Warren:

But after all that’s said and done, the Commission did attempt to determine the equities accepting as a basis the testimony would be in those witnesses.

Edward A. McDermott:

No, that the testimony of a witness presented jointly by the petitioners.

Earl Warren:

Is that B & O?

Edward A. McDermott:

No, that would be Erie-Lackawanna, D & H and —

Earl Warren:

(Inaudible) was the B & O — was the one B & O (Voice Overlap) —

Edward A. McDermott:

No, no, B & O was not a party to this proceeding.

Earl Warren:

It has nothing to do with that?

Edward A. McDermott:

No, that’s correct.

Abe Fortas:

Is this the only opportunity that there will be for Boston and Maine to attack the exchange ratio?

That is correct Mr. Justice Fortas.

How does that work?

Why do we have to pass on it now?

Edward A. McDermott:

Well —

Abe Fortas:

This has not been accepted by Boston and Maine, has it?

Edward A. McDermott:

No, it has not.

It has not been submitted and I might say on that sir that —

Abe Fortas:

Alright, they’d submit — it hasn’t been submitted, the Boston and Maine?

Edward A. McDermott:

Correct.

Abe Fortas:

Well isn’t — won’t that — won’t there be a proceeding, subsequent proceedings when it is submitted to Boston and Maine and isn’t that the time when the exchange ratio will be right for judicial consideration?

Edward A. McDermott:

Well, this is a hazardous area in which to make a prediction as to future litigation.

But I submit to you that what more — what would more likely happen is a submission of the terms as ultimately determined by the Commission and the stockholders of Boston and Maine would vote on those and they would accept or reject.

Abe Fortas:

(Inaudible)

Edward A. McDermott:

And then the corporation would be based with the procedural consequences of that action.

Abe Fortas:

Yes, I’d wonder.

I’m not clear on this from — apart from it.

But I wonder if these exchange ratios are right for our consideration at this time.

Now, I can understand that it might be argued that since exchange ratios have not been finally, conclusively settled for all the time, we ought not to permit the merger to go into effect.

That’s a wonderful line of argument.

But, if — what you seemed to be doing, it’s argued that we ought to review the exchange ratio at this time, I confess I have some problems in my mind because the exchange ratios are not final in the sense that there has been approval, offer and acceptance, and administrative approval.

Edward A. McDermott:

That is correct — that is substantially correct Mr. Justice.

But I believe it’s also correct to say that our position here as to B & M is that we say that the Commission acted unreasonably in failing to properly credit Boston and Maine with the savings it will make to the system, that under the Administrative Procedure Act Section 8 (b), that the — the Court can take a look at that question.

The only exchange ratio that we’re concerned with of course is our own and I must take that I cannot presently foresee any situation where that issue could properly again be brought before this Court in this proceeding.

Abe Fortas:

But suppose your stockholders agree with you and they reject this —

Edward A. McDermott:

Yes.

Abe Fortas:

— what happens?

Well, under such a situation and assuming that D & H had accepted the terms proposed for them, then under the outstanding orders of the Commission, we would be precluded from proceeding in Penn-Central either on a joint application with Penn-Central or on a petition filed under that reserved authority.

Edward A. McDermott:

And then —

Abe Fortas:

And we would have to seek our home elsewhere.

Edward A. McDermott:

Then — well, then you’d — your stockholders rejected the offer, I don’t know, would you have a court remedy at that point?

Abe Fortas:

I suppose not.

Edward A. McDermott:

I would think not sir.

I would think not.

To conclude, I would like to state that to correct the error as to B & M and it is substantial error.

The proceedings need only be remanded to the Commission for a limited further hearings and findings as to the value consistent with its findings as to the type of control exercised.

Under such an order, Penn-Central can be consummated, and resolution of the New Haven problem can proceed.

The finding of the statutory court as to E & L and D & H in the Inclusion Case can be affirmed and their inclusion that N & W can proceed subject to appropriate vote of the stock — of D & H stockholders.

As the District Court stated remand for the purpose of stock by B & M would in no way prevent inclusion but rather would facilitate it.

Under such an order, B & M can subsequently and hopefully soon join that enlarged system if fair terms are prescribed.

Thank you.

Earl Warren:

Mr. Von Starck.

Ernest R. Von Starck:

Mr. Chief Justice, may it please the Court.

The time allowed for this argument does not permit of a legal analysis in depth but I would hope, be able to achieve your interest and perhaps your sympathy in a problem of Reading which is unique.

Ernest R. Von Starck:

It’s particularly unique since it doesn’t relate to a dilemma and it has to do with the law.

The fact of the matter is that the Reading railroad is the only small railroad in the eastern part of the United States that has not received the protection of Appendix G condition and has no assurance of a home in a large system.

We are concerned, deeply concerned that in the haste with which this case must be concluded that Reading’s problem may not receive the attention which we think it deserve.

It’s quite possible that Reading may be the railroad which Mr. Justice Brennan had in mind when he said he feared that a case by case system of restructuring the eastern railroads which had been insisted upon by the Commission who would lead to the destruction of a railroad performing an essential public service.

Now Reading’s problem, drawn out of the fact that when the Penn-Central merger was first proposed, Reading did not ask inclusion.

It introduced no evidence of traffic diversion and did not oppose the merger.

They did this because at that time, it believed that there were reasons why it would soon be merged into B & O-C & O.

B & O had retained experts to make merger studies.

It had increased its holdings from 40% to almost 50% of the Reading stock and it had supplied Reading with qualified officers for the express purpose of restoring Reading to a profitable basis.

However, B & O began to cool on its merger plans and in August 1965, Reading management learned to regret their decision to have kept out of the Penn-Central case.

At that time, N & W and C & O much to the surprise of the world, announced their merger plans which included Reading and CNJ, Reading’s subsidiary, solely as a part of the Dereco package.

The Dereco package consisted of the five small railroads.

It was immediately clear to the Reading management that this plan would take years for approval and might even never be approved and that in the meantime, Reading would have to meet the full force of the Penn-Central competition unprotected.

And I say, full force of the competition, I mean it.

Reading’s lines are practically parallel by the Pennsylvania line.

Virtually every large customer that Reading has is also a customer of the Pennsylvania.

Hugo L. Black:

Where does Reading run to and from?

Ernest R. Von Starck:

Reading lines are located primarily in Eastern Pennsylvania with trackage up into New Jersey and some down into Delaware.

There is no city of any consequence that Reading serves that is not also served by Pennsylvania.

And obviously with the inducements that Penn-Central will have after this merger many, many of Reading’s primary customers can be wooed away and this is what concerned Reading very much.

At the time it discovered that its merger plans were completely frustrated, it couldn’t do anything about it but it acted just as soon as it could and that was when the Commission’s order came out approving the Penn-Central and providing this unanticipated Appendix G condition.

Those were unprecedented, and up until that time, nobody had ever realized that the Commission would provide interim protection for a railroad until it had been included into a major system.

However, when Reading asked that the record be opened and that it would be permitted to put in this evidence, the Commission turned down Reading on the simple ground that it was guilty of latches.

And that they expressed an unfounded suspicion, that it was a scheme instigated by N & W to delay the Penn-Central merger.

Now, I don’t have any more time but I would like to just say that the District Court affirmed the Commission on these same grounds of delay and I think it is an obvious principle of administrative law that the responsibility of this Commission is through the public.

It is not a passive arbitrary, it must accept evidence that is relevant with respect to the public interest and we now ask this Court to correct both the District Court and the Commission and to direct that Commission to accept the evidence of public interest which we have to offer.

And we do not ask that the merger be stayed pending there because if we are found to be entitled to indemnity conditions, they can be made retroactive and the public that is served by Reading will be protected.

Abe Fortas:

I don’t understand your position entirely either.

You are not asking us to set aside the District Court’s order of permitting the merger to go forward.

Ernest R. Von Starck:

No —

Abe Fortas:

All you’re asking us to do is to order that the Commission have a hearing on your — the grievance that you communicated to us, is that right?

Ernest R. Von Starck:

Yes sir.

And to direct that if indemnity conditions are found to be appropriate that they maybe made retroactive.

Thank you.

Earl Warren:

Mr. MacDougall.

Gordon P. Macdougall:

Mr. Chief Justice and may it please the Court.

I am Gordon MacDougall.

I appear here for the City of Scranton and Mr. Shapp.

Our ultimate objective is to secure a hearing in a District Court without the dismissal with prejudice the failure to prosecute in the Penn-Central case hanging over our heads from the Southern District of New York.

We were never parties to the Norfolk and Western Inclusion Case in the New York court.

We claimed we’ve not had our day in Court on either of these two ICC orders.

Our dismissal with prejudice in Penn-Central was made despite our motion for leave to withdraw, despite the fact that the United States and the Commission never even answered our intermitting complaints —

William J. Brennan, Jr.:

What you are saying is you want a hearing on the merits of the merger in the pending Pennsylvania District Court suit?

Gordon P. Macdougall:

Right, we want a hearing on that.

We want to clear this dismissal with prejudice in Penn-Central.

William J. Brennan, Jr.:

So — which you may have — go forward with the District Court action, is that it?

Gordon P. Macdougall:

We are afraid.

We’ll put it this way.

The answer of United States to us in the Pennsylvania District Court is that it’s res judicata as to Penn-Central.

They stayed us all summer long and therefore we would like to alleviate this res judicata.

William J. Brennan, Jr.:

But what’s was the status of those?

Gordon P. Macdougall:

Oh, we’re going to have a hearing next week.

It’s December 15th.

William J. Brennan, Jr.:

A hearing of what?

Gordon P. Macdougall:

Yes, we filed our briefs in the Penn-Central and the Inclusion Case in the Pennsylvania Court and the Government will answer that on December 13th.

William J. Brennan, Jr.:

What’s the nature of the hearing?

Gordon P. Macdougall:

It’s on the permanent injunction to set aside the orders on the merger and the Inclusion Case, both consolidated in one case.

And the hearing is next Friday the 15th and the Court’s order will provide for reply briefs after that.

I would imagine that the case would be probably submitted at the end of the year, ready for that —

Byron R. White:

How did you become a party in the New York case?

Gordon P. Macdougall:

We had been interveners on behalf of Erie-Lackawanna in September 1966.

Byron R. White:

So you were a party?

Gordon P. Macdougall:

We’re a party at that time.

Byron R. White:

And weren’t you —

Gordon P. Macdougall:

We did not —

Byron R. White:

— obliged to raise all the questions about the merger, you had to raised in the — in order of the three-judge-court of New York.

Gordon P. Macdougall:

Well, two reasons, no.

Because the New York court declined to consolidate these two cases for pleadings, briefings and hearing.

Byron R. White:

Oh, I don’t — it’s about the consolidation —

Gordon P. Macdougall:

Well, our —

Byron R. White:

— its about you, you as a party, were you required if you were going to attack the order of New York court which you were.

Gordon P. Macdougall:

Yes.

Byron R. White:

But you’re required to raise all your grounds if you attack that?

Gordon P. Macdougall:

No, what happened was that on the mandate from this Court to the District Court, the District Court issued an order on mandate from this Court in which they just kept an injunction and remanded the cause completely back to Interstate Commerce Commission —

Byron R. White:

Oh, I understand that, but you remained a party to the case.

Gordon P. Macdougall:

Well, we would — we moved to withdraw from the case.

We had served honest show cause order.

You see, the railroads and the Government met with the judges —

Byron R. White:

And they — and —

Gordon P. Macdougall:

— on the 16th of June, and they got —

Byron R. White:

And they refused to let you withdraw?

Gordon P. Macdougall:

That’s right.

Byron R. White:

Do you think that —

Gordon P. Macdougall:

— in the Penn-Central case.

Byron R. White:

Was that error?

Gordon P. Macdougall:

Yes, we cite that as error that our motion to withdraw should’ve been granted, right.

Byron R. White:

Let’s assume that it was an error.

Gordon P. Macdougall:

Well, that is a — it wasn’t (Inaudible), I —

Byron R. White:

Then you were required to submit what ground you had to attack the merger in the New York court.

Gordon P. Macdougall:

We were given until August 2nd to attack it and to file our brief six days later, on August 8th.

Byron R. White:

Well, were you required —

Gordon P. Macdougall:

(Inaudible)

Byron R. White:

Assume that schedule was a reasonable one.

Were you required to follow it?

I mean, isn’t it proper to make it?

Gordon P. Macdougall:

Well, they said you are required to follow it or be dismissed with prejudice in Penn-Central.

Byron R. White:

That’s right.

Gordon P. Macdougall:

That’s right.

Byron R. White:

And you think that to, do you think you’re entitled to present some grounds to attack the merger in New York in some other grounds and some other —

Gordon P. Macdougall:

Well —

Byron R. White:

— requirements?

Gordon P. Macdougall:

We didn’t assert it.

The — when the — we intervened on behalf of Erie-Lackawanna’s behalf in September 1966 and when you sent it back to the District Court, that Court sent it back to the Commission and then the case was over, the way we look at the situation.

And —

(Inaudible)

Gordon P. Macdougall:

Pardon?

We intervened on behalf of Erie-Lack —

William J. Brennan, Jr.:

But in the District Court proceedings?

Gordon P. Macdougall:

In the District Court in September 1966.

We were here before you.

William J. Brennan, Jr.:

And you say that’s over because the District Court sent it back to the Commission.

Gordon P. Macdougall:

They sent it back.

They issued an order on mandate, right.

And that’s in our jurisdictional statement at pages 5 and 6.

William J. Brennan, Jr.:

I don’t think so.

Byron R. White:

Well, they did — there weren’t new complaints filed after the second ICC order (Voice Overlap).

William J. Brennan, Jr.:

Oh, yes there were, yes.

Byron R. White:

New cases?

New case —

William J. Brennan, Jr.:

Everyone had to file a new complaint in New York.

William J. Brennan, Jr.:

That was the order which we were requested to go along with.

We are requested to —

Byron R. White:

New complaints for (Voice Overlap) —

Gordon P. Macdougall:

New complaints — pardon?

Supplemental complaints —

Byron R. White:

(Inaudible)

Supplemental.

Gordon P. Macdougall:

In Penn-Central.

William J. Brennan, Jr.:

But wasn’t there a retention of jurisdiction over the District Court would have remanded to the Commission?

Gordon P. Macdougall:

No, there wasn’t.

It was specifically asked for by the Erie-Lackawanna Railroad, I think with some others and there was no specific retention.

You see, at that time, everybody thought that Appendix G would not be reimposed because you people, I mean, I’m sorry, this Court had a statement in it that these controversial conditions wouldn’t happen.

Well, instead of the cases being consolidated at the ICC in having one opinion in Penn-Central and in Inclusion Case which amended, everyone would have to go to one court, the Commission split it.

And so at the time the order on mandate came down from the District Court, I’m afraid that the thinking of everybody was different than what finally came to pass.

I think the only thing standing in the way of orderly judicial review of Penn-Central and the Inclusion Case, we see, it is the cash shortage on the New Haven.

If it weren’t for that, I think it would be pretty good but the New Haven situation is pressing a — is pressing us.

And we like to point out that in this November 21st report of the Commission which states that for — on page 10 there, it says, the first eight months of 1967, the New Haven sustained a cash attrition of at least 5.3 million.

The trustees now state before you on page 8 of their motion that the cash attrition for the first ten months was only 5.17 million which shows an improvement of the New Haven situation.

At the November 21st ICC report estimates that the New Haven will have 3.1 million at the end of the year and now trustees tell us that they’ll have only 2.0 million at the end of the year.

There’s a difference of 1.1 million.

We think that something is either inconsistent or has been omitted in this New Haven situation.

Earl Warren:

We’ll recess now.

(Inaudible)you can finish your argument (Voice Overlap) —

Gordon P. Macdougall:

I have three minutes left.

Earl Warren:

Yes, go right ahead.

Gordon P. Macdougall:

I just like to clarify that we are the only parties attacking the public interest and either the Penn-Central or the Inclusion Case.

Those cases are together in Pennsylvania.

The record in the Penn-Central case was never before the District Court of New York.

As the views you have today, the basic record — administrative record of the ICC was not placed before the New York court leading up to that April 6, 1966 order.

And there are other parties out in Pennsylvania besides us.

Gordon P. Macdougall:

There is Moosic and Pottsville.

And they have two ICC orders which the Commission and United States say are wholly interrelated, that’s Penn-Central and the Inclusion Case completely intertwined and inextricably intertwined.

And the merits before — are not before you and either the Inclusion Case or the Penn-Central case and the basic reason apart from all of the procedural reasons why we did not go forward in New York on Penn-Central was because the City of Scranton and the parties I represent believe that these — that the case by case method simply will not work.

Scranton is not served by Penn or Central.

It is served by E-L, D & H and the CNJ and they can’t go into a case and attack Penn-Central on one case and the Inclusion Case in another case.

The adverse impact of the inclusion bringing E-L and D & H together as one railroad in the Scranton area must be considered in determining whether Penn-Central is in the public interest and that’s the position we —

The record is — the record in this Court in the original District Court case?

Gordon P. Macdougall:

The record here?

Yes.

Edward A. McDermott:

This I don’t know.

I don’t believe it was — forwarded here, you mean the — of last year of September 1966?

(Inaudible)

Edward A. McDermott:

The record at the Commission —

(Inaudible)

I don’t understand it.

Edward A. McDermott:

You know you did not have the record of the ICC in the Penn-Central case.

It was up here on interlocutory injunction and the record was not filed here.

And it wasn’t filed this time and it will be filed however in Pennsylvania.

None of these railroad parties are attacking the public interest of Penn-Central, so they didn’t follow the record.

It’s only us.

We’re the only people.

And one reason that we’ve been having a lot of trouble is that the Commission has stacked up at the ICC a whole series of case by case mergers for the Western District and we just saw the Great Northern — Northern Pacific merger come down the other day.

Earl Warren:

Since when was that you say?

Edward A. McDermott:

The Northern Lines merger was announced by the Commission on November 30th and it reversed the decision which they had denied that, Northern Lines merger, and that decision was released the same day as the Penn-Central merger was April 27th, 1966.

And the case by case method is all stacked up and unless something happens, we’re going to have — I feel damage in the east and all over the country.

Thank you, my time is up.

Earl Warren:

Mr. Fooshee.

Malcolm Fooshee:

May it please the Court.

I represent Mutual Life Insurance Companies owning some $30 million of bonds in the Erie-Lackawanna.

At the very outset, we wish to emphasize that we do not oppose the immediate inclusion of E-L in the N & W system.

Malcolm Fooshee:

We do not ask for a stay of the ICC’s order of approval.

We ask only that it would be made clear that under that part of the order which retains jurisdiction in the ICC, E-L bondholders will have the right to apply for relief if N & W, an important competitor of E-L, should abuse the control of E-L which the plan approved by the Commission gives it.

This basic protection, we have consistently requested from the first time when we were allowed to intervene before the Commission.

Our need for such protection stems from the fact that E-L, to be a new corporation to be formed only to take over E-L’s present assets and assume its debts is to be completely controlled by N & W which parallels and competes vigorously with E-L’s most important line between Chicago and Buffalo.

While the Commission spent many pages in finding that the stock ratios to E-L were fair, it made no findings whatsoever to the effect of this plan on the rights of E-L bondholders.

Indeed, it didn’t even mention their objections.

Now N & W has argued here that Erie’s bondholders said they rather see E-L go bankrupt and modify its staff.

None of appellant bondholder here Your Honors ever made such a statement.

We did decline to approve a drastic modification presented to us in a matter of days by E-L’s management on a take it or leave it basis.

We have never been presented with an opportunity to negotiate a reasonable modification.

Now Section 5 (2) specific requirements apply in favor of bondholders as well as stockholders that any plan under Section 5 (2) must be fair.

Indeed, precisely because unlike stockholders, bondholders lack the power to vote, approval or disapproval of a plan, bondholders are the ones most absolutely dependent on the Commission’s protection.

Now the need of bondholders for protectionhere cannot, we submit, be seriously questioned.

First of all, N & W would henceforth — will henceforth be in a position to divert to its parallel route at E-L’s expense, much of E-L’s very important Chicago-Buffalo traffic.

Indeed, there is a positive threat that N & W may do so.

A joint report on merger issued by committee of N & W and E-L operating representatives before a proposal of this controlled grant concluded and the hearing examiner found that by downgrading to a single track, E-L’s parallel route in double tracking its own and by certain additional unifications, N & W could realize about $17 million a year in operating savings as opposed to about $1.8 million back can — that were allowable within the realms of control, bounds of control alone.

But there is nothing to assure that N & W will stay within the narrow limits contemplated by the Commission once it acquires control and becomes in fact the sole stockholder of E-L.

On the contrary, E-L itself insisted in April in persuading the Commission to approve this plan that it is simply inconceivable that N & W will not by the early 1970’s obtain that enormous, almost 10 times larger, potential gain by merger.

And I quote on what E-L said, “Unless N & W finds, it can obtain most of that potential gain while E-L is merely a 100% controlled subsidiary”.

Moreover, there’s a further particularly imperative need for protection here where E-L’s bonds include more than $70 million of income bonds whose interest of $3 million a year is contingent on earnings of E-L’s own line.

Its earnings will depend on N & W’s decisions not only as to traffic routings but as to operating expenses, allocations of shared overheads, and the like.

Abe Fortas:

Well, has a proposal been made to the bondholders?

Has a proposal been made which bondholders don’t like?

Is that what you’re telling us?

Malcolm Fooshee:

Yes indeed.

Abe Fortas:

And what —

Malcolm Fooshee:

It —

Abe Fortas:

And what is the proposal in terms of the bondholders?

Malcolm Fooshee:

It’s a very complicated proposal Your Honor which in saying that we had rejected it, neither E-L nor N & W nor any other parties who’ve complained about are not having taken this take it or leave it — have seen fit to describe either to the court below or to you.

Abe Fortas:

Well, you mean it’s —

Malcolm Fooshee:

Yes — it —

Abe Fortas:

— too complicated for us to consider?

Malcolm Fooshee:

Not at all, Your Honor.

I commend it.

I commend it to your examination Your Honor.

It is so drastic as well as being complicated and we think violates all priorities.

Of course nothing was to be done of E-L’s stock but it was the drastic feature of this and a very complicated matter.

Byron R. White:

Did the Commission examine it?

Malcolm Fooshee:

It was put before the Commission, the Commission never mentioned it.

It was in the great record of very high documents.

But the theory of the other side seems to be that an offer is made to us unless we accept it, we have no right to have its fairness examined.

No comment ever made on it.

Hugo L. Black:

You do not challenge the whole orders.

You do not challenge putting the order into effect, would you?

Malcolm Fooshee:

We do not Your Honor.

Hugo L. Black:

You only do it insofar as you want a reservation made for your bond?

Malcolm Fooshee:

A reservation — exactly, Your Honor.

That is —

Hugo L. Black:

Doesn’t mean maybe that it will cost more or less in the future than it has been indicated as it would now?

Malcolm Fooshee:

What would cost more, Your Honor?

Hugo L. Black:

The bond, the bond to — more money that have to go to them or less money than what’s indicated now.

Malcolm Fooshee:

We —

Hugo L. Black:

What I’m getting at is this.

How can you put through a merger if everybody that has bonds objects to making a final disposition of it before the merger takes place?

Malcolm Fooshee:

Your Honor, we have had no opportunity to negotiate.

Our vote is not called for —

Hugo L. Black:

I’m not talking about the justice of it.

I’m talking about how could you put through a merger if that’s the —

Malcolm Fooshee:

Section 5 (2) Your Honor requires no vote from stockholders at all.

5 (2) never contemplated in our opinion that it would be used as a debt reduction proceeding.

Malcolm Fooshee:

It, as this Court has said, time and again, is essentially a consensual proceeding.

Stockholders agree on — of two roads on merger, one road wants to acquire control and it acquires as much control as it can but there maybe minority stockholders.

There is no compulsion in — under 5 (2).

Bondholders have never been dealt with this way before.

Hugo L. Black:

What I’m asking —

Malcolm Fooshee:

They —

Hugo L. Black:

What I’m asking is quite different, that the number here, objecting to this going through and like reservations are made to do certain things in the future to the reference to their business.

How can you put through a merger on any such basis?

Malcolm Fooshee:

We merely want to have a reservation to come back to the Commission if there is an abuse of the control beyond what the Commission contemplate, beyond what the Commission contemplated or should have contemplated as bounds —

Hugo L. Black:

Do you think following your suggestion, the suggestion about the bondholders will result in factually frustrating the completion of the merger after the merger has already been completed?

Malcolm Fooshee:

Not at all, Your Honor.

Hugo L. Black:

Why?

Malcolm Fooshee:

We would hope that the imposition that the clarification that this retention of jurisdiction which the Commission has made.

First, it made it for the purpose of carrying out the terms and provisions of the plan.

Then after it heard our argument, we filed our exceptions, we filed our brief, it broadened that to reserve jurisdiction to enter orders which are whatever insofar as they might be appropriate.

Now this we think ought to apply to us.

We believe the —

Hugo L. Black:

You want your name put in there.

Malcolm Fooshee:

Yes, we would like.

We have never been mentioned before.

This may well apply to us.

It may be broad enough.

But when we have —

Hugo L. Black:

Well, that (Inaudible) tend to frustrate the ultimate completion of the proceeding.

Malcolm Fooshee:

Not at all, you — well, there will be a reservation so that if N & W steps over the bounds and its control, we can come back and apply to the Commission and ask them to require it to stay within the bounds.

But this conclusion, this consummation of the inclusion proceeding and it can go forward immediately.

This would cause no delay.

This Court could enter —

Hugo L. Black:

Are you saying that what the order they are making with reference to your people will cause the bondholders to lose a part of their bond?

Malcolm Fooshee:

It will — it may well cause, and I will hope to show you in just a moment that the earning power can be taken from behind our bonds that no — for 50 years, N & W can see that no interest is payable on all these more than $70 million income bonds which at $3 million a year, they mature in 2015 and 2020, $50 — to 50 at $3 million a year for 50 years is more than a 100 — is about $150 million and if that’s compounded, it’s enormously beyond that.

Malcolm Fooshee:

Thank you, Your Honor.

We hope — we think this will cause no delay to enter such a mandate as was entered in the Railway Executives case in 379 U.S.

Thank you.

Earl Warren:

Mr. Solicitor General.

Erwin N. Griswold:

May it please the Court.

There are of course in effect although there are nine separate numbers here and a great mass of papers, there are essentially two problems with various ramifications which come from those problem.

One is the merger of the Pennsylvania and New York Central railroads and there is no one here who is in substance opposing that merger except the — you’ve heard the City of Scranton and the — Mr. Shapp who appears in the same case.

William J. Brennan, Jr.:

You’re going to submit the (Inaudible) —

Erwin N. Griswold:

Well, I would suppose —

William J. Brennan, Jr.:

— in light of that?

Erwin N. Griswold:

I would suppose that they should have appeared in the New York City — in the three-judge District Court in New York and that they are properly foreclosed for not having.

William J. Brennan, Jr.:

And would be foreclosed in the pending actions of the District Court of Pennsylvania?

Erwin N. Griswold:

Yes, that the decision of the Court in New York operates its res judicata to determine their interest in that case.

Then we also have the Inclusion Case on which has a long background but which is the direct consequence in its present posture of this Court’s decision earlier this year in the earlier — in the previous term.

Before discussing the Inclusion Case, I would like to observe that this proceeding perhaps has its roots 47 years ago in the Transportation Act 1920 when Congress laid down the policy that there should be mergers and consolidations of railroads.

A matter with which the Interstate Commerce Commission struggled for a great many years and as far as the east is concerned, developments have happened only very recently.

And with respect to the Penn-Central merger itself, I don’t know when negotiations for that began, but the proceeding before the Interstate Commerce Commission seeking approval of an arrangement which had previously been worked out, it was filed on March 9, 1962 which is five years and nine months ago.

And in the interval, an enormous amount of effort, the time and thought of many people are representing the private interest concerned representing the public through states and cities and shippers, and the staff and the members of the Interstate Commerce Commission had been working on this.

Abe Fortas:

Mr. Solicitor General, forgive me for interrupting your argument.

I want to go back to your opening statement which you said that nobody opposes the merger except for the City of Scranton and Mr. Shapp.

Is that true of the B & O and N & W who are (Voice Overlap)?

Erwin N. Griswold:

It’s my understanding that they do not oppose the merger but they do oppose the inclusion terms.

If I’m wrong on that, I’m sure that some of the subsequent counsel here will correct me.

Potter Stewart:

They oppose the adequacy of the inclusion proceeding and they further maintain that no merger can take place —

Erwin N. Griswold:

They maintain —

Potter Stewart:

— it’s only (Voice Overlap) —

Erwin N. Griswold:

— this unless there are — unless they — unless the rights which they claim with respect to inclusion are upheld, that then the merger should not go ahead.

But if I can put it this way, if we look just at the merger alone, there is no one who says that the merger should not be made except the City of Scranton and the gentleman who is associated in that case.

Abe Fortas:

Well, I’m not sure about it, but it is quite important.

I got the impression during the argument that the position of the B & O and the N & W was that the merger should not be consummated unless the inclusion proceedings were first consummated and consummated in a way that they consider fair.

Erwin N. Griswold:

I think that is correct.

Abe Fortas:

So that really does amount to —

Erwin N. Griswold:

That the position of the Norfolk and Western is — that the existing order of the Interstate Commerce Commission in the present circumstances does not carry out the mandate of this Court’s decision of last term, which if it is taken one phrase and the opinion is taken literally, that there must be found a haven for these roads that that has not been done.

And that therefore the merger should not be carried out until that has been done.

I think that illustrates the point I was about to make.

I’m rather a new comer to this matter.

And as I have thought about it, I couldn’t help thinking of the old Mexican shell game where you put a pea here and then try to cover it and then you move over here and try to find it there and everything — it’s very hard to put your finger on what there is.

We were told this morning that the situation with respect to valuation has entirely changed from what it was when the Commission made its original order in this matter.

And of course it has and it will always be that way whenever the Commission makes a decision with respect to valuation by the time it gets before this Court for review, a considerable amount of time will have expired and the situation will be different.

If that one is the controlling factor, it would never be possible to carry out a merger such as Congress long ago contemplated.

And then we find that the situation is very difficult because there are constant changes even by letter received by this Court last Thursday or Friday with respect to the attitudes of the parties as to whether they will or will not accept the terms of inclusion.

It seems to me that this or let me put it in another way, I have the fortunate opportunity here of appearing on behalf of the public interest.

There are numerous private interests involved here which are of course important and which are — will be fully presented to the Court.

But the public interest here is to provide the country with adequate and proper railroad transportation on fair terms to shippers as well as to the investors in the railroad companies.

The function of the Court in this case, it seems to me is not to administer the Transportation Act, that is the function of the Interstate Commerce Commission which has spent a great deal of time and effort, skill, experience on this matter.

And the function of the Court is not to decide itself to the matter, but to determine whether the Commission has acted in accordance with the proper procedures has reached results which are not arbitrary and no one can tell whether the Commission has reached the precisely correct results.

This is not an area in which there is a precise truth and it is the position of the Government here that the Commission has acted intelligently and fairly, not only in formulating the terms of the merger and of the inclusion but in seeking to carry out the mandate of the Court of the last term.

When this case was here before, the United States and the Interstate Commerce Commission took different positions.

The Interstate Commerce Commission urged the immediate affirmance of the merger order.

The United States took the position which the Court upheld that the merger should not go forward until further steps were taken with respect to the three railroads, the Erie-Lackawanna, the Delaware & Hudson and the Boston & Maine.

Now it is suggested that that aspect of the order has not been carried out because we do not have to present to this Court a need — package in which the Boston & Maine, the Delaware & Hudson and the Erie-Lackawanna are now a part of the Norfolk & Western system.

Of course as it was pointed out in the argument earlier today, the Commission has no power to require these roads to accept inclusion in the Norfolk & Western system.

What the Commission has done is to fix fair and equitable terms for their inclusion and they are free to accept them or not.

And this is one of the places where the difference between the public interest and the private interest perhaps most clearly appears.

The situation in our law is that matters of this sort can depend a good deal upon the action of the stockholders of these companies.

And we tend to think when we look at things superficially that of course the stockholders will represent all interest.

That becomes difficult to uphold when we think in terms of the stockholders, let us say of the New Haven railroad who by no stretch of the imagination have any remaining interest in that property at all and yet it may well be that unless some new law is made that they may be called upon to approve steps which are taken with respect to the New Haven railroad.

Now with respect to the Delaware & Hudson and the Boston & Maine, we have a situation where the stockholders had been put in a place where they can negotiate, bargain, hold up, offer, try to get a better deal and it is to their interest to refrain from accepting the inclusion terms as long as they can if there remains any conceivable prospect that in anyway from any other source, they might get some kind of an arrangement which would be more attractive to them.

The stockholders in this situation with respect to both of these companies, Delaware & Hudson and Boston & Maine obviously had been put in a position where they have simply a hold up value.

They are — the consummation of the Penn-Central merger is a matter of very great importance which there is much public interest and which there is great private interest.

Erwin N. Griswold:

They sit back and say, “Well, we haven’t made up our minds.

We don’t know what we’re going to do”.

There is great concern about moving the merger ahead promptly not merely because of the private interest concerned but especially because of the situation with respect to the New Haven railroad and its effect on transportation to the whole New England area.

Now when one looks at it simply from the point of view of what is the way that I can get the most out of this, it seems to me reasonably obvious that you sit back and wait and try to see if you can’t get any better offer from someone in the situation where there is understood to be no power to require the inclusion of these roads.

Not only is there this hold up value in the situation but there is also what I would call the playoff value.

That you not only have the right to hold up on accepting going in to Norfolk & Western with the great leverage from the fact that because you’re hold up, you tie up the whole merger and nobody knows what will happen with the New Haven and all the other things.

But you also have the chance to try to stir up interest with respect to other possible customers which might be the Penn-Central.

It might be some other merger which could be worked out over a course of a great deal of time.

It might conceivably be some sort of a New England railroad, the viability of which I find hard to be sure of.

The Norfolk & Western here makes a great deal of the Appendix G conditions and I must confess that I find some sympathy with that point of view as far as the time duration of those conditions are involved.

It seems to me that it might be possible to bring this matter to a conclusion which is obviously in the public interest if some formulation were found which would require the Boston & Maine and the Delaware & Hudson either to accept the inclusion conditions or to know that they would have to stand on their own feet which is a very hard thing for them to do.

The Appendix G conditions are stated in — that is the duration, the term of them are stated in full in the Interstate Commerce Commission’s report.

It seems to me that considering how these matters often go that they provide a period which might extend as long as four years within which these two roads could continue to negotiate and seek to find a better offer.

If that was reduced to a fixed, flat period, six months, three months, it might be possible to find out what is going to happen here and have something more fixed and specific with which to deal.

Norfolk & Western complains because it says that, as it now stands, it is going to be required to take the Erie-Lackawanna and doesn’t know whether it will get the Boston & Maine and the Delaware & Hudson.

It points out that Judge Friendly in his opinion below and incidentally I think it’s not inappropriate to say that this seems to me to be a very remarkable opinion and as I have worked on this case, I’ve constantly found myself coming back to it and finding there — well, set out the answers to the questions which were published — puzzling me.

Norfolk & Western points out that Judge Friendly said on page 61 of his opinion that the Commission made no finding as to the Erie-Lackawanna’s Penn-Central losses in the event that the Delaware & Hudson was not included and that is true but that is really an alternative ground of his decision.

Earlier in that opinion, two or three pages earlier, Judge Friendly had pointed out that the burden of proof on this issue was with respect to — was on the Norfolk & Western.

Norfolk & Western was in no sense taken by surprise.

There was never a joint petition for inclusion, never a petition that the Erie-Lackawanna, Delaware & Hudson and Boston & Maine should be included.

There were always separate petitions for inclusion filed by each road and as Judge Friendly points out the Norfolk & Western was the custodian of the figures and knowledge and it had the burden of presenting evidence that — but permitted judgment of the degree to which the petitioners would protect this traffic.

It failed to do that even on the assumption that all three were included, let alone on less probable eventualities.

So that I think that Norfolk & Western’s position here can be answered on the ground that it is presented rather late and that if its real objection is that it ought not to be required to take the Erie-Lackawanna alone, it should have presented evidence on that at an earlier state in this proceeding.

Byron R. White:

Mr. Solicitor General, perhaps you could clear me up whether the Commission ever find that the merger of Penn-Central, Penn and the Central would be in the public interest if the three railroads became part of that system?

Erwin N. Griswold:

I’m afraid I have no knowledge about that.

Mr. Ginnane, the counsel of the Interstate Commerce Commission tells me there has been no such finding.

Byron R. White:

Well, if one of the possibilities, if these railroads don’t accept the present results of the Inclusion Case and the other possibility is going into Penn-Central, how can the Commission not have — if it wants the merger to go forward, how can it say that it has not found that inclusion would not be in the public interest, Penn-Central, because we have to — how can the merger go forward if it’s necessary to find that it is in the public interest to include the three — these three lines.

Erwin N. Griswold:

As I understand it, there was — at the time of decision, no issue before the Commission with respect to the inclusion of these three lines and Penn-Central, isn’t that right Mr. Ginnane?

Byron R. White:

Well, I can take it —

Erwin N. Griswold:

They had petitioned for inclusion at an earlier time and had withdrawn those petitions in Penn-Central.

Erwin N. Griswold:

I suppose that I am influenced by my New England background but I find it extremely difficult to see how inclusion of these three roads and Penn-Central could conceivably be in the public interest because it would mean a situation of complete lack of competition in an entire area of the country and the (Voice Overlap) —

Byron R. White:

And why is it this then though — why is — if the Commission wants the Penn-Central merger to go forward, it seems to me that it has almost found that if it hasn’t expressly and had — for all practical purposes found that inclusion of these three roads in Penn-Central would not be able to (Voice Overlap) —

Erwin N. Griswold:

It seems to me that for all practical purposes it has so found.

I do not believe that it has actually made such a finding.

This is implicit in the finding that it would be in the public interest for them to be included in the Norfolk & Western merger.

I suppose that what the Commission had in mind was that you can’t ever foresee what things will be in the future.

And it did not foreclose for all time completely the possibility that these roads might become a part of Penn-Central.

Byron R. White:

Well, what do you say that as long as there is an open — that there is an open alternative for these three roads, namely to go in to the Penn-Central system that the Penn-Central merger should not go forward?

Erwin N. Griswold:

No, I don’t think I — I don’t think I —

Byron R. White:

(Inaudible) because you’ve already indicated that you would say that the public interest would require that the merger not go forward if these three roads were involved because there would be monopoly conditions in New England.

Now, certainly the Commission has never found yet that creating that kind of a situation would be in the public interest enough to permit the Penn and Central to merge on — in that condition.

It never count that yet.

Erwin N. Griswold:

Then I would be greatly surprised if they would find it here.

I’m not able to say much more because I don’t think there’s any record here which should — deals specifically with the question of D.C.Road becoming a part of Penn-Central.

The whole underlying basis of the Commission’s action in this matter in providing the inclusion order shows that it understood, its understanding was that the public interest would be served by having these three roads included in the Norfolk & Western system, thus providing access by the Norfolk & Western from Buffalo to the New York City gateway and a competition among railroads in New England.

Abe Fortas:

Mr. Solicitor General may I put to you some basic propositions here related to the colloquy between you and Mr. Justice White and let’s see if the — what your position is with respect to them.

It’s my understanding that the fundamental problem in the inclusion prior this case stems from the conclusion that if Penn-Central merger went through without some provision being made or viable future for these three small roads, they — those three small roads would be injured and that would be contrary to the public interest.

And this Court came to the conclusion that the injury to the public interest which would be consequent upon that eventuality was so substantial that it would not permit the merger to go through unless something were done about it.

Now, are you — are we together —

Erwin N. Griswold:

I think we’re in —

Abe Fortas:

— this far?

Erwin N. Griswold:

I think we’re entirely —

Abe Fortas:

Alright that’s —

Erwin N. Griswold:

— together.

Abe Fortas:

— point one.

Point two, the question which we now have before us it seems to me is tentatively, is whether the net of that reason is that the Commission had to provide to these three roads a fair and reasonable alternative, that is to say, whether the Commission had to offer and provide for the offer to these roads of a specific home in which their future would be protected?

Erwin N. Griswold:

Yes, and it is our position that the Commission has done that.

But the Commission has no power to require them to accept it.

Abe Fortas:

Now, it’s not of — now, if that is the case and the issue before us is not whether these roads will or will not accept it but whether the Commission has done what this Court held to be its duty —

Erwin N. Griswold:

And that is our —

Abe Fortas:

(Inaudible)

Erwin N. Griswold:

— precisely our position and it is the reason why we think the judgment below should be affirmed.

Earl Warren:

Mr. Solicitor General, may I ask you just one broad question, is it your argument that it is in the public interest for this Court to give a blanket affirmance of the judgment below without requiring the Commission to retain jurisdiction for any purpose in the placing of this merger and inclusion?

Erwin N. Griswold:

Well, it is our position that the Court should affirm the judgment below.

I don’t think we have taken any position that it shouldn’t be remanded to the Commission to give oversight as to how it is carried out and to deal with matters of detail in the process of carrying out the merger.

Earl Warren:

So, does it occur to you that if there are any — on any of these issues that the Commission should retain some jurisdiction other than it has for the purpose of placing it and seeing that the rights that are contemplated under the Commission’s order are actually given?

Erwin N. Griswold:

I don’t know of any such issue.

Mr. Fooshee has raised the question with respect to bondholders of the Erie-Lackawanna as to whether they might have their security drained away by the action of the combined management.

I would suppose that no reservation was needed even to protect the — that interest because the courts of equity will remain open and if the management favors one group of creditors over another creditor in an equity court or conceivably through proceedings to the Interstate Commerce Commission can take care of it, whether any reservation is made or not.

Abe Fortas:

But the Commission did reserve jurisdiction, is it not?

I can’t —

Erwin N. Griswold:

I believe —

Abe Fortas:

— put my hands —

Erwin N. Griswold:

I believe it did.

This is —

Abe Fortas:

I can’t put my hands on the reservation of jurisdiction in this mass of papers here but it — wasn’t there a general reservation of jurisdiction?

Erwin N. Griswold:

I believe there is a general reservation of jurisdiction.

That of course would be to act within whatever scope and ambit is left after this Court’s mandate.

Earl Warren:

Mr. Barr.

Thomas D. Barr:

Mr. Chief Justice, may it please the Court.

I represent the Erie-Lackawanna.

I’m going to speak about the Inclusion Case and I’ll respond directly to the points made by Mr. Trienens earlier this morning.

Particularly, the method that the Commission used to value the Erie-Lackawanna and the Commission in the Court’s findings that Erie-Lackawanna should be included in the Norfolk & Western without regard to whether B & M and D & H are included.

I have furnished the Court with a map, it’s on a little brown folder and during the course of my argument, it maybe helpful to the Court to refer to that matter.

Prior to 1964, the Norfolk & Western was a little railroad that ran east from Cincinnati and Columbus, Ohio through West Virginia down to the Port of Norfolk.

It had annual revenues of a little bit more than $200 million, was 25% owned by the Pennsylvania Railroad and Mr. Stuart (Inaudible) is now the president of Pennsylvania and was then the president of the Norfolk & Western.

He got together with Mr. Pevler, now the president of the Norfolk & Western but then the president of the Wabash which was 65% owned by the Pennsylvania Railroad and they got together with the Nickel Plate and formed a new system which the Commission approved in 1964.

That system is the map I’ve given you shows runs from Kansas City and Omaha and St. Louis through Chicago in Toledo, in Detroit into Buffalo.

The revenue of that new system is about triple with what the old Norfolk & Western was.

The net income is more than doubled.

Thomas D. Barr:

Approval of that system by the Commission gave the N & W three very important things.

One, it gave them $29 million a year of annual operating savings.

It has already enabled that new system to generate an additional $50 million of revenue over and above what the system was in 1964.

And of course it gave them a great jump on the rest of the East, the Penn-Central in the rest of us.The price of that consolidation was Appendix O which you all know about.

Erie-Lackawanna presently has about $230 million of revenue and it rus from Chicago East through Buffalo, New York on a line which is generally south of the lines of the old Nickel Plate and Wabash and now part of the Norfolk & Western and then it runs through Buffalo about 450 miles further east into the Port of New York.

But the Port of New York area not only has about 10% of the population of the United States but it also does about 10% of the manufacturing and commercial activity in the United States.

In the context of a Penn-Central merger, Erie-Lackawanna is vital from competitive point of view to the Norfolk & Western.

Erie-Lackawanna serves 113 points, also served by Penn-Central but not served by the Norfolk & Western.

And those points include New York, Rochester, Syracuse, Scranton, Pennsylvania, Youngstown, Ohio.

The Commission has found that Erie-Lackawanna stockholders should receive about $50 million in present value for their stock from the Norfolk & Western.

I want to explain to you very briefly just to touch on the basis and the method in which it went about doing that.

Byron R. White:

(Inaudible) stock that the Commission thought there were — that the mortgage had (Inaudible) — the mortgage deed had ample value, underlying your mortgage or not?

Thomas D. Barr:

Let me explain the situation with respect to the bondholders Mr. Justice White.

Before we filed our application, before we filed our plan with the Commission, we went to our bondholders.

We told them that in the judgment of (Inaudible) who we’d hired as financial experts, the Commission would not authorize a full merger of Erie-Lackawanna into N & W unless the debt holders who owned $350 million worth of face amount of debt would agree to a write down of their debt.

Byron R. White:

Are those general mortgage bonds and all the —

Thomas D. Barr:

Those are all of the debts Mr. Justice White all of the debt holders, general mortgage, contingent interest bondholders, every kind of debt that we have.

And the reason for that was perfectly simple, although that the bondholders were — had a face amount of debt of $350 million, the market value of that debt was about half of that.

And if we require Norfolk & Western to assume that debt, it would become the value, the market value of the Erie-Lackawanna bond would double on the day that the Norfolk & Western assume the value.

So we said to the bondholders, if you want a full merger in our judgment, you’re going to have to agree to write your debt down.

You’re going to take Norfolk & Western securities for it.

Its worth more in the market than the securities you now have and you’re going to have to agree to reduction.

If you don’t, we believe the only thing that the Commission will authorize is a control relation, stock control.

Now the creditors sent back the word to us that they were not at all interested and this includes too of Mr. Fooshee’s clients and this was before the hearings ever began before the evidence was ever submitted.

Now Mr. Fooshee and his clients did not come in to the Commission and submit any evidence whatsoever.

They did not suggest to the Commission that any plan other than the plan that the Erie-Lackawanna proposed should be undertaken by the Commission until after all the evidence was in.

They started by saying they wanted a merger and they wanted assumption of that debt.

Now all they want is some kind of a reservation jurisdiction in case the Norfolk & Western at some future time does something, they don’t know what that might in some way injure them.

They don’t know how.

Byron R. White:

Why is the market value of the debt only half of its face value?

Thomas D. Barr:

Well, I’m not an expert on the market Your Honor but it is because —

Byron R. White:

With poor chances of being paid?

Thomas D. Barr:

Certainly.

Not poor chances of being paid but the fact that the interest hasn’t been paid.

In the contingent interest bonds and that’s what I’m talking about particularly, the market value was only about a third.

Interest had not been paid on those contingent interest bonds for three years I believe at the time or perhaps more than that at the time of the plan but the market had valued them relative to the Norfolk & Western which is the problem much lower than the bond of the Norfolk & Western.

The bonds also were old bonds and the interest rate was relatively low and I suppose a financial expert would give you a number of other reasons as well.

Now, the first thing I think that the Commission looked at in valuing the Erie-Lackawanna was the turnaround and this is an important turnaround.

In 1961, the year that the Norfolk & Western entered into an agreement with the Erie-Lackawanna to negotiate forthwith in good faith for the inclusion of Erie-Lackawanna-Norfolk & Western, Erie-Lackawanna lost $26.5 million.

In 1963, the last year end figures available to the Norfolk & Western when they irrevocably ascended to Appendix O, Erie-Lackawanna lost $17.1 million.

In 1964, Erie-Lackawanna lost $8.3 million and let me pause in point to the significance of that figure.

In August of 1965, the Norfolk & Western announced to the public and then the Erie-Lackawanna that it was entering into a merger with the agreement with the C & O and that as a side proposal to that merger, it would enter into a so-called Dereco plan to take in five small carriers including the Erie-Lackawanna.

Under that plan, Norfolk & Western offered Erie-Lackawanna’s shareholders a package which they valued at $43 million.

Now they arrived at that $43 million in a very simple way.

This is spelled out in our brief below at page 12.

They took 1964 earnings, a loss of $8.3 million and adjusted it for two things, first, for an assumed elimination of 75% of the commuter deficit.

And second, for the assumed consolidation savings that would result from theinclusion of Erie-Lackawanna and Norfolk & Western.

Byron R. White:

By merger?

Thomas D. Barr:

No Your Honor, absolutely not by merger.

In the same way it is being included now.

Now, my point is not that the Dereco offer was worth that because we thought it was not.

It was not then and we think it is not now.

But the point is that Norfolk & Western concluded that it was worth $43 million and it did it primarily on the basis of a loss of $8.3 million.

Abe Fortas:

Well, the net of it is that Norfolk & Western emerges as a sole — would emerge as the sole stockholder of Erie and Lackawanna?

Thomas D. Barr:

Yes, Your Honor.

Abe Fortas:

And that the Erie and Lackawanna —

Thomas D. Barr:

That’s not —

Abe Fortas:

— would remain —

Thomas D. Barr:

In due course.

Abe Fortas:

Right.

Abe Fortas:

And in due course, Erie and Lackawanna would remain as corporate entity and the bondholders of Erie and Lackawanna would have whatever claim they’ve got.

Thomas D. Barr:

Exactly the claim they now have.

Exactly what their indenture gives them, no more and no less.

And they asked the approval of the Commission that they were entitled in no less.

And that’s what Judge Friendly said, they’ve got a contract.

They don’t claim the contract has been violated and we don’t see any point in considering giving them any relief.

Abe Fortas:

Is that the same difference?

Thomas D. Barr:

I beg your pardon.

Abe Fortas:

It’s the same difference.

Thomas D. Barr:

The same difference, yes sir.

Now, you maybe told that the Norfolk & Western and C & O concluded that they could make this magnificent offer of $43 million to the Erie-Lackawanna because of the strength of the new N & W-C & O system.

That is not so and we’ve attached to the motion to affirm in the Inclusion Case, a memorandum which Mr. Fishwick, the Senior Vice President of the Norfolk & Western prepared and Mr. Pevler read to the Norfolk & Western Board of Directors as the sole basis, the sole basis for the Norfolk & Western Board’s approval of the C & O merger and approval of the Dereco plan.

We’ve got that memorandum out of an unrelated court proceeding and we introduced it into evidence before the Commission and I called it particularly to their attention as I now call it to yours.

On page 8 A of our Appendix, Mr. Pevler tells the Norfolk & Western Board, “The inclusion of the other railroads, the Erie-Lackawanna and these other four, through subsidiaries makes the deal even more attractive”.

He then talks about the tax savings which I will talk about in a minute and points out that this would lead to savings to Norfolk & Western a net income of $75 to $100 million.

He talks about the operating savings in the increased business generated and he points out that Erie-Lack — that Norfolk & Western’s net income per share of stock would rise from $11.82 a share to $18 a share.

Norfolk & Western and C & O have always cast this Dereco plan as a sort of poverty program designed for the welfare of these five railroads.

It just isn’t that.

It is a bonanza for the Norfolk & Western.

Now going back to what the Commission did and this was —

Abe Fortas:

Perhaps I —

Thomas D. Barr:

— one of the Court —

Abe Fortas:

Perhaps, I missed you.

Is that true even though D & H has not — doesn’t go along?

Thomas D. Barr:

Yes Your Honor, that is truly —

Abe Fortas:

What you’re talking about is true, just an inclusion limited to the Erie-Lackawanna.

Thomas D. Barr:

That is true, Your Honor and I’m going to come to that as my second point and I’ll deal with that at some length.

The Commission used the years of 1965 and 1966 as the base period for considering Erie-Lackawanna earnings.

And in those years, the new management which Erie-Lackawanna had been fortunate enough to attain — obtain in 1963, the results of that management begin to show a revenue in 9 — in the base period, that two-year period, was up $23 million as against 1961.

But this is important too, the expenses were down $7 million.

Thomas D. Barr:

We detail at great length how the new management had turned it around, the Commission accepted and approved that evidence.

Taking the base period, the Commission then made adjustments to the net income for those two years, both up and down, and concluded the future average annual earnings would be normally about $9.6 million.

That is net after all charges.

Mr. Trienens read to you this morning the Commission’s finding that the public interest would be served here only if Erie-Lackawanna were able to cover its fixed charges.

That doesn’t mean that Erie-Lackawanna should earn $9.6 million.

It means that Erie-Lackawanna should earn nothing at all.

That will cover fixed charges.

Now let me take this $9.6 million.

The Commission compared that figure to Norfolk & Western’s earnings and worked out a mathematical exchange ratio, the ratio was .172 shares of Norfolk & Western stock for each share of Erie-Lackawanna stock.

But they didn’t give us .172 to one or anything like it.

They discounted it twice.

First, they discounted it about 25% to .128 to one.

Then they discounted to the second time because they didn’t give us Norfolk & Western stock, they gave us stock in a new corporation, NC stock which will not pay dividends for five years and which is convertible into Norfolk & Western stock only at the end of those five years.

Norfolk & Western’s financial expert testified that under those circumstances, the stock of the new corporation would sell for 15% to 20% below N & W’s stock into which it is convertible five years hence.

So that means that the Commission took this $9.6 million and discounted it about 40%.

The reason why it did that is perfectly clear and said so, because the quality of the earnings are different and by that they meant the leverage factor.

Erie-Lackawanna has relatively high fixed charges and because of its past losses does not pay income taxes.

Norfolk & Western has relatively low fixed charges and does pay income taxes.

That’s when you’re comparing the net, the fluctuation in Erie-Lackawanna’s will be much more extreme —

Abe Fortas:

You’re talking about —

Thomas D. Barr:

— in bad times of —

Abe Fortas:

You’re talking about the earnings of Erie and Lackawanna though assuming that it remained as a separate —

Thomas D. Barr:

No Your Honor, I’m not.

Abe Fortas:

— as a separate entity?

Thomas D. Barr:

No sir, I’m not.

I’m talking about the earnings as a part of the Norfolk & Western system because this $9.6 million includes million eight of operating savings and it also includes a million six of traffic gains.

Abe Fortas:

Well then, what you’re saying that the bondholders’ fear of a hesitation and dilution of their efforts is quite farfetched.

Thomas D. Barr:

Quite farfetched is exactly the way I would describe it, Your Honor.

I would not have — even spend anytime with it.

I think Judge Friendly deals with it quite adequately and I would leave it to that.

Thomas D. Barr:

In addition to these earnings said the Commission, even if the earnings are not sufficient to support the exchange ratio, Norfolk & Western’s investment will be well protected by the tax benefits.

These are the benefits that Mr. Fishwick and Mr. Pevler told the N & W Board about.

We’ve quantified those benefits.

Commissioner Webb, the hearing officer adopted our testimony, N & W did not accept to his findings the Commission adopted.

They are absolutely undisputed and they are very large — I’ll mention just two of it.

First, each and every year, Erie-Lackawanna will give to Norfolk & Western a million dollars in investment credit, not a tax deduction but an investment credit.

In addition to that $1 million in the Commission’s language, and I quote, “For every dollar by which E-L earnings fall below $10.2 million, N & W would obtain a tax benefit of 48 cents which would directly produce earnings for Norfolk & Western stockholders”.

As we show in our brief if we have zero earnings, there would still be a contribution to Norfolk & Western of six million dollars in net income through the tax deduction by filing a consolidated return.

That’s —

Abe Fortas:

Is there anything in the D & H-E and L situation comparable to Appendix G?

Thomas D. Barr:

No Your Honor, there is not.

Abe Fortas:

I suppose the fear of —

Thomas D. Barr:

There are some conditions, but they’re minor and they relate to —

Abe Fortas:

I suppose the fear of the bondholders is that Norfolk & Western as emerging as a sole stockholder of E & L, will so handle the fears of E & L that there won’t be any interest — they won’t pay any money to pay their — the interest on their bonds.

Thomas D. Barr:

Judge Friendly —

Abe Fortas:

Theoretically, that would seem to be a possibility.

Thomas D. Barr:

Theoretically, that is a possibility Your Honor, and if the Norfolk & Western violates the contracts that these bondholders have or if they deal with them in a —

Abe Fortas:

No, no, not violating.

It wouldn’t be violating contracts.

Thomas D. Barr:

Oh, I suggest —

Abe Fortas:

(Inaudible)

Thomas D. Barr:

— they would Your Honor if they do what you suggest because they would — the only way they can do that is by diverting traffic improperly away from the Norfolk & Western.

Abe Fortas:

Well, then you have a question as to whether the bondholders have a remedy against that.

Thomas D. Barr:

Judge Friendly said —

Abe Fortas:

I mean, I —

Thomas D. Barr:

— they have —

Abe Fortas:

I don’t think —

Thomas D. Barr:

— and I agree with him.

Abe Fortas:

I don’t think your remarks here is making a concession binding on Norfolk & Western.

Thomas D. Barr:

I’m sure they will tell you that they do not.

Thomas D. Barr:

Now, I mentioned 1967 earnings only in passing.

The Commission had before every conceivable kind of financial information from the beginning of 1956 through the first quarter of 1967.

Every railroad in the United States has lost revenue this year.

Every railroads earnings are down.

Our first six months showed a loss of $7.7 million.

For the New York Central, the first six months of 1966, they made $36.6 million and in the first six months of 1967, they lost $2.6 million.

But Pennsylvania was down from $33 million to $7 million.

Even the Norfolk & Western which is building in this $29 million of annual operating savings went down from $71 million to $54 million.

The process of judicial review just can’t work if on six months more of earnings, this Court will send it back to the Commission for a new consideration because we’ll just go on doing that forever.

It will always change.

Now I want to turn to the findings that both the District Court made and the Commission made with respect to the inclusion of the D & H and B & M.

I call to the Court’s attention in this respect the map I think maybe particularly helpful, but I first call to the Court’s attention Judge Friendly’s finding on page 57 of the opinion in which he states, “The record which contain not only a study of the gains from inclusion of all three roads, the four-way study, but studies of the gains from the inclusion of each supports the earnings ratio established for E-L even on the assumption that neither D & H nor B & M is included”.

The Commission expressly found and ordered Erie-Lack — the Norfolk & Western to include Erie-Lackawanna even if neither B & A — B & M nor D & H were included.

In the reply of N & W to the petitions of D & H and B & M for reconsideration, N & W did not file a petition for reconsideration but in their reply, they said in passing, “The Commission’s findings are based upon the explicit premise that all three of the petitioners will be included.”

The Commission in its report on reconsideration expressly said that Norfolk & Western was wrong and repeated the order and the finding directing Norfolk & Western to include Erie-Lackawanna in Norfolk & Western even if D & H and B & M are not included.

Now N & W says those findings are inadequate because they say, this Court must assume that B & M and D & H stockholders were both to reject these terms and because the Court must further assume that if they do, D & H and Erie-Lackawanna’s value relative to the Norfolk & Western will be substantially reduced.

Now if the stockholders both know there are four possibilities that the B & M and D & H stockholders both know, first, they will stay independent.

Second, they will be included in Penn-Central.

Third, they will become involved in a New England system which is what Mr. Dumaine of the Norfolk — of the Delaware & Hudson has in mind and that’s what this letter relates to.

And third, they will be included forth — they will be included in an N & W-C & O system.

I say, the only alternative that the Commission have to concern itself with, the only possible alternative it could have considered is that the two railroad would remain independent because any future consolidation involving Penn-Central or New England system or anything you want, any future consisting — system — consolidation requires Commission approval under Section 5.

I cannot imagine the Interstate Commerce Commission creating a monopoly in all of New England, Northern New York, the rail service simply because that the stockholders of the D & H and the B & M will have it no other way.

But let us assume that they did make such a finding.

The Commission would still have the power and be required to condition that finding upon terms and conditions which would at least attempt to continue to promote competition and the only way to do that is through the Erie-Lackawanna’s connection with the D & H (Inaudible).

That is the time to consider what the problem is, to measure what the problem is, the Commission has shown through Appendix G of the Penn-Central case that it is capable of doing that and that is the time to let them do it.

But let me just refer to this map and show you what the facts — the basic simple facts in light of this.

Erie-Lackawanna and Norfolk & Western will have revenues of $850 million and freight revenues of about $815 million.

D & H and B & M will have revenues of about $100 million and freight revenues of about $90 million.

The only thing we’re concerned with is east-west traffic.

This — the east-west traffic presently moves from the Erie-Lackawanna to the Delaware & Hudson at Binghamton, New York and Delaware & Hudson then carries it 150 miles to the B & M and gives it to the B & M a mechanic bill.

Thomas D. Barr:

The bulk of all east bound and west bound traffic on those railroads now moves that way.

There are only two present, possible, physical alternatives.

First, the B & M on east — on west bound traffic that give it to the New York Central at mechanic bill, Rotterdam Junction.

That would cut the D & H out of the movement entirely, but the Boston & Maine doesn’t do that today.

The reason they — today, deliver it three times as much the D & H as they do to the B & M at the same place — I’m sorry.

They deliver three times as much to the D & H as they do to the Central at the same place.

They deliver it to the New York Central only that traffic which New York Central has to terminate.

The reason is perfectly simple.

On this map, we don’t have the New York Central but the New York Central has a line that runs from Albany to Boston through Springfield and Worcester that the B & M starts giving away his traffic to the New York Central, it only a matter of days until the New York Central reaches back in to the same origin, and picks the traffic up and that’s the end of it.

That’s the reason why B & M doesn’t give it today.

The D & H could carry the traffic given to it by the B & M down to the Pennsylvania at Wilkes-Barre.

It doesn’t do that today for two perfectly good reasons.

One is because the route is circuitous.

The Pennsylvania has to carry it south to Harrisburg to put it on the main line of the Pennsylvania.

The other reason is because it’s not economic.

The D & H does not receive enough money for carrying out the additional distance beyond bringing it up until Wilkes-Barre so it doesn’t do it.

And let’s assume a Penn-Central system and assume that D & H and B & M remained independent or that Mr. Dumaine’s idea, dream of a New England system becomes a reality, what happens to the traffic?

First, you have to understand that under the Penn-Central plan of operation, all traffic originating or terminating west of Youngstown, Ohio and destined to or from New England or the State of New York will move on the New York Central main line.

But the main line of the New York Central runs north from New York City through Albany where it gears directly west and runs along the southern border of the Great Lakes, the so-called New York Central Water Level route.

New York Central is building a big yard at Albany, the Selkirk yard and all traffic will move through that yard.

Alright, what happens?

This is the problem that Mr. Shapp and Scranton have.

They — downgrading of the Pennsylvania main line through Pennsylvania and moving all the traffic up to the New York Central.

What happens to D & H and B & M?

It’s conceivable that the D & H will give west bound traffic to the New York Central at Albany and cut itself out of the hall entirely, its 150 miles from Albany to Binghamton.

The D & H might as well go out of business as gives its traffic to the New York Central.

Abe Fortas:

Well, is the thrust of what you’re telling us that even if B & — if Erie and Lackawanna were the only one included in the D & H, it still be alright?

Thomas D. Barr:

Absolutely.

Abe Fortas:

Is that the simplicity of —

Thomas D. Barr:

There is no —

Abe Fortas:

— what you’re telling us?

Thomas D. Barr:

— possible way that the traffic can move except over the Erie-Lackawanna, no possible way.

The traffic — the Commission said that the railroads are interdependent.

They are but the D & H and the B & M are dependent upon the Erie-Lackawanna.

It’s not the other way around.

The D & H is not going to solicit traffic east bound for the New York Central because that just eliminates the D & H from any movement.

That’s preposterous.

Same thing is true about the B & M.

In addition to the New York Central which they presently have this competition in New England, they’re going to have the New Haven.

They’re not going to give their traffic away to the New York Central system or the Penn-Central system anymore than they presently give it away in New York Central.

There aren’t any other alternatives.

Well, there is a possibility you might — theoretically, you might take it up to Canada and move it above the Great Lakes, that’s the other physical possibility but that is not a realistic one.

Now the traffic studies which I will not try to describe except to say this about the —

(Inaudible)

Thomas D. Barr:

We made five traffic studies.

We studied our own traffic.

We studied two-way merger, two-way control, four-way merger, four-way control and we studied the impact of Penn-Central on a merged Norfolk & Western-Erie-Lackawanna system.

The reason we studied it on a merged system is because what we have proposed was a two-step merger.

The first step was control, the second step with merger and we suggested a number of ways by which the Norfolk & Western could take care of the debt problem when we pointed out that there at least $15 million of additional operating savings through merger and we think the Norfolk & Western will merge with Erie-Lackawanna in due course.

But the Commission concluded there should not be a merger.

The Norfolk & Western did not make any studies at all of its own traffic.

They simply presented critiques of our traffic.

All of their critiques of all of our traffic studies were rejected by the Commission.

N & W made one more traffic study and that was a four-way control study of the impact of Penn-Central on the package that Mr. Trienens said this morning.

They did not make or try to make or suggested the Commission that there ought to be made a study which would give the evidence which N & W now says the Commission should have had with respect of breaking these down in two-way control.

Now, the — our brief makes clear how the studies that are in the record bear out with the physical facts that I’ve tried to show to you by the map suggests.

Abe Fortas:

Well then you are —

Thomas D. Barr:

This is why —

Abe Fortas:

Is all these on the assumption of — assumption that we’ve got to conclude that the Commission did not err in saying you have to include all of these — each one of these railroads or two of them or three of them?

Are you assuming that the Commission — that we have to — do we have to decide or do we have to conclude that the Commission did not err in making that determination or if we — if on the other hand, we should say that it was error for the Commission to order the inclusion of these roads, one of them or two of them if they didn’t know — go on, we say that as an abstract manner that’s error.

Abe Fortas:

Then you’re arguing that it doesn’t make any difference anyway financially so far as —

Thomas D. Barr:

I am arguing —

Abe Fortas:

— Erie and Lackawanna is concerned.

Thomas D. Barr:

I’m arguing that the problem is so small and so insignificant —

Abe Fortas:

Yes.

Thomas D. Barr:

— that it is not and that the findings that were made by the Commission are perfectly adequate to deal with —

Abe Fortas:

But how about the basis —

Thomas D. Barr:

This is a tempest in the teapot, Your Honor.

Abe Fortas:

Yes, alright, let’s lay the teapot.

How about the basic proposition?

How about the teapot?

You — are you — is it your position that the Commission — that we have to review that question as to whether if only one of these roads goes along with this and not all three of them, it still works out alright?

Thomas D. Barr:

No, I don’t think you do Your Honor.

I think you should — because I think I indicated in the beginning, assume that the Commission’s order will be carried out.

I don’t think that any other proper or —

Abe Fortas:

Or another —

Thomas D. Barr:

— if any other assumption is proper.

Abe Fortas:

— possibility, I mean another possibility may be to assume that all the Commission had to do was to make it possible for any one of these three roads that wanted too to accept a fair offer.

Thomas D. Barr:

Mr. Justice Fortas that is all the Commission can do.

Abe Fortas:

Well now, if that is correct, do we have to go any further at all?

Thomas D. Barr:

No sir, you do not.

And I (Voice Overlap) —

Abe Fortas:

All we have to do is to find out whether the Commission made sure that there was provision opened to each of these roads for inclusion in one of these systems.

And if there was such provision, does that — does it or does not — does it not in your opinion in the judicial job?

Thomas D. Barr:

It seems to me it ends the judicial job, Mr. Justice Fortas.

I don’t — if you get any deeper than that, I don’t know where you’re in.

You just keep going back and forth.

Let me end by saying simply this that unlike many of the records that have been before this Court in some of these merger proceedings where the applicants only presented evidence where the evidence was not cross-examined, where the parties did not present any evidence to the contrary, every single bit of evidence in this case was vigorously brought over by all of the parties.

This record is thorough, it’s extensive that it contains nothing but hard realistic facts that all counsel have had more than their day in Court to challenge.

It may not be a perfect order.

Thomas D. Barr:

There may be no perfect resolution to this problem in the east but I submit to this Court, the Commission’s order is the best that anyone could reasonably expect and it ought to be affirmed by this Court.

Thank you, sir.

Earl Warren:

Mr. Silleck.

Harry G. Silleck, Jr.:

May it please the Court.

In view of the expedition of this proceeding before this Court under necessary shortening of the discussion of the issues which this entails in the papers filed with you.

I may not be entirely fair to the N & W in what I’m about to say but I think it follows from their papers in this Court that N & W raises no issue at all as to fairness to N & W of the terms for D & H inclusion except its point concerning the absence of a basis for including D & H in N & W, unless B & M is also in fact included.

This claim of N & W with this — in this regard is based on its theory that Mr. Trienens advanced this morning in which you will see repeated a number of times in the November 30th brief that N & W was expected to acquire these three roads only as a package.

And as you will see from that brief, that whole argument is predicated on that theory and this theory of a package or that the Commission has predicated its findings on the theory of a package is absurd on its face.

The Commission did no such thing.

It obviously did not because it expressly provided for E-L’s inclusion without either D & H or B & M and for D & H’s inclusion without B & M.

Instead of predicating its decision on such a package concept, the Commission predicated its conclusions on the facts of geography and its determination to provide as much direct competition for Penn-Central as it can through piecemeal inclusion in N & W of these three roads.

Now the reason for that is geographical.

Mr. Barr has already pointed out to you that the E-L is has an end to end connection between the N & W at Buffalo and the D & H at Bingham — Binghamton, D & H is likewise a line that is an end to end connection between the Erie-Lackawanna and the Boston & Maine.

And the Boston & Maine goes on from the Albany area to Boston and to Portland.

And these facts of geography coupled with the natural economic forces of competition to which Mr. Barr referred in connection with E-L that makes it equally true that if B & M is not in fact included but chooses to remain an independent carrier, the competition from Penn-Central which B & M will face within New England will tend to force B & M to work even more closely than it does today with D & H, E-L and N & W assuming that D & H accepts the terms.

Now we’ve shown in our papers that the terms generally for D & H inclusion are fair to N & W whether or not B & M is included.

So I will now turn to the question which had been raised at some length in these arguments today of whether D & H will in fact accept the inclusion on the present terms assuming the Commission’s order in the Inclusion Case as upheld by this Court.

This question appears to be of significance only on the issue raised by N & W as to the fairness of the E-L terms if D & H is not included.

The speculation on this question has centered on the fact that Mr. Dumaine who I must point out has been president of the D & H only since August 1 of this year, has stated that he was searching for an alternative which might be more in the interest of D & H stockholder.

In its jurisdictional statements and its briefs and in its argument today, N & W would have you believe that Mr. Du — that the alternative that Mr. Dumaine is looking for is inclusion of D & H in the Penn-Central system.

They know better.

I categorically denied it as I categorically denied it in the court below the only system that Mr. Dumaine has considered as a possible alternative is what he refers to as a New England system opposed to D & H and B & M together and such other New England roads as maybe interested in joining in.

Now they’ve said we’ve negotiated with Penn-Central in effect because you’ll see in the November 30th brief a reference to our attempting to use these terms as a floor for further negotiation.

There’s absolutely no basis for this implication that we have negotiated.

It is false and there is no intention of negotiating it.

And even if there were, it would be virtually impossible for any sensible man to think you could come out with better terms for inclusion in Penn-Central after reecting the N & W inclusion terms in view of the fact that the Commission has provided that we cannot be included mandatorily in Penn-Central.

We’re up against an attempt voluntarily to persuade Penn-Central to pay us better terms after they have completely surrounded us by going to — Pennsylvania going to Albany and to Montreal and going into Boston by this Boston and Albany line center.

It is ridiculous just to make any such suggestion that it is Penn-Central that we maybe interested in looking at.

Abe Fortas:

Well, you’re here for Delaware & Hudson?

Harry G. Silleck, Jr.:

Yes sir.

Abe Fortas:

And Mr. Dumaine is the president in that, is that right?

Harry G. Silleck, Jr.:

Yes.

Abe Fortas:

And you’re here urging that we affirm the judgment below, is that right?

Harry G. Silleck, Jr.:

Yes, Your Honor.

Abe Fortas:

No ifs, ands, and buts and no conditions, is that correct?

Harry G. Silleck, Jr.:

Correct.

Abe Fortas:

Well now, is this an academic exercise or an indication of interest in the public welfare or do we assume that Delaware & Hudson, in spite Mr. Dumaine’s letter wants to have this approval, presumably, so that it can be appropriate transactions can be completed and the matter is presented to the stockholders or whatever is required for consummation, is that a fair assumption?

Harry G. Silleck, Jr.:

We certainly do want it to be approved from that standpoint and as far as we know today, Mr. Dumaine may never come up with a proposal.

He said he was in the process of trying to formulate one.

He knows that there is some dissatisfaction among the B & M stockholders with the present terms.

And it is possible, he had thought, that a combination of B & M and D & H going it along together, might solve the problem in a way that would be as fair or fairer than the terms which D & H can get for inclusion in the N & W.

Abe Fortas:

But he is bound by what you’re saying today, hasn’t he?

I mean I don’t under — quite understand this.

Harry G. Silleck, Jr.:

I’m sorry, Your Honor.

Abe Fortas:

I don’t quite understand this.

You’re the counsel for the Delaware & Hudson.

Harry G. Silleck, Jr.:

Yes.

Abe Fortas:

And he is the president of it.

So I assume you’re speaking for him in that capacity.

Harry G. Silleck, Jr.:

He is speaking in his capacity as a stockholder as well as president.

Abe Fortas:

I see.

That explained it.

I got you.

Harry G. Silleck, Jr.:

Mr. Barr has shown that the record would support the inclusion of E-L in the system without D & H inclusion and in that regard I would like to add one point because I wish to pick direct issue with the Solicitor General’s remarks that we are in a position to or want to try to hold up these merger matters.

That is not our position at all.

And one point I would like to make in connection with the Erie-Lackawanna’s inclusion whether or not D & H is included, is the fact the N & W itself induced this conclusion of the Commission that Erie should be included whether or not the other two roads are included.

They say today, that if included at all, they should be included as a package.

I defy you to square this that what they said in their exceptions to the Commission which is the last principal document they filed in support of their own position.

When they said in their conclusion, any order for D & H and B & M should be conditioned on the simultaneous inclusion of the other end of E-L but they never said that the inclusion of E-L should be conditioned on the simultaneous or any other inclusion of D & H and B & M.

They have deliberately led the Commission into believing that they would accept E-L inclusions without the other two roads and the reason again is economic.

Harry G. Silleck, Jr.:

Their interest in coming to New York is very real as Mr. McDermott for the Boston & Maine pointed out this morning, they have encouraged on the other hand the thought that D & H and B & M might even go in the Penn-Central system.

They have done this not only by saying that they just assumed to see it happened, but they have said publicly to encourage the D & H and B & M stockholders that they would get a better price if they went with Penn-Central.

This is an effort on the part of N & W simply to offset the terms for the inclusion of these three roads if they possibly can because of the possibility which always exists that the stockholders may not accept the opportunity which is offered to them.

There is no intention on the part of D & H to hold up the inclusion of E-L as I have just said.

There is likewise no intention on the part of D & H to hold up the Penn-Central merger.

It is the position that the Delaware & Hudson, that if you affirm the N & W Inclusion Cases, I think you should, the Penn-Central merger should be permitted to go to immediate consummation.

Thank you Your Honors.

Earl Warren:

Mr. Auerback.

Joseph Auerbach:

Mr. Chief Justice, may it please the Court.

No one questions that there is no solution for the New Haven except its inclusion in a Penn-Central system.

There is no other way that anyone has proposed whereby it could survive.

No one questions that the New Haven’s operations are essential in the public interest.

The Commission has found that now again and again.

The problem faced by the trustees therefore this time is, how can the New Haven survive until it is physically included in a Penn-Central system?

This is a problem, which up until a matter of two weeks ago had no answer.

At that time, the Commission provided an answer by a supplemental order and a report dated November 16 which was the culmination of proceedings that have been in progress ever since this Court’s consideration of these proceedings a year ago.

The Commission provided two things.

First, they said that upon merger, Penn-Central would be required to participate in New Haven’s operating losses for a three-year period upon a formula which had as its maximum, it cost Penn-Central of $5.5 million a year.

Second, that until such time as New Haven could be physically included, Penn-Central would be required as a merged company to be the banker of the New Haven up to $25 million and up to three years in duration.

Now, these two techniques provide the means for preserving the New Haven if you have a Penn-Central merger.

The first that is to say, the sharing of losses for the first time permits the creditors of the New Haven to have someone else bear the burden of the erosion of the estate that occurs apart from the cash aspects of its operations.

The New Haven has been operating on a cash basis now since 1961 when the reorganization started.

But while its income statement sets out one set of figures, its cash is a problem of merely meeting payrolls no matter how much erosion occurs as you continue to operate and that’s what has happened here.

This sharing by Penn-Central however, will take part of the burden off the back of the creditors while this s kept alive in the public interest until it has been physically included in Penn-Central.

The second problem as I indicated which is a cash problem is alleviated because that is the amount of cash which is deemed, would keep the New Haven alive for the next three years.

William J. Brennan, Jr.:

(Inaudible)

Joseph Auerbach:

There are some administrative work that remains to be done Mr. Justice Brennan.

Under the Commission’s order, the Penn and Central people and the trustees are required to file in 35 days the documents which will carry out the Commission’s views.

William J. Brennan, Jr.:

How about judicial review about it?

Joseph Auerbach:

I’m sorry sir.

William J. Brennan, Jr.:

How about judicial review of that — whether (Inaudible)?

Joseph Auerbach:

There is no doubt that our bondholders, some of them have appeared here today are going to appeal whatever happens in this instance.

We don’t question that.

And we say before this Court, the issue that you must consider is — are those appeals such as to go to fundamentals of the preservation of the New Haven or are they appeals as to which effective judicial review will exist to protect our bondholders.

Now the position which we would take before the Court is, and I will go into these issues in some detail, that no matter what can happen here, there is effective judicial review and there is protection for all bondholders.

Now, before I get into the specifics of that, let me point out to the Court that only one of our bondholders in terms of right has appeared here, our first mortgage bondholders.

We have two other series.

We have a series which constitutes a divisional lien on some of our most valuable property.

And that’s senior to our first mortgage, that’s known as the Harlem River division bonds.

And we have a bond issue that’s junior to our first mortgage known as the general income bonds which has in effect a second mortgage.

Now we have a reorganization plan going at this time to which there has been some reference in the briefs of the bondholder groups here as to which hearings have been completed.

In that reorganization plan, the trustees have proposed to the Commission that the junior equity in this estate is not the first mortgage, but the general income bonds, and that speed is essential in carrying out inclusion of the New Haven, or that some method is required to have a sharing of losses pending that inclusion in order not to prejudice the most junior equity.

Not to be sure, the trustees can be wrong on that.

I don’t need to argue here if the trustees plan is correct or not.

That’s something that’s just now being submitted to the Commission on briefs.

But the significant thing is, is it possible to protect those rights?

Is it possible to protect the rights of the first mortgage?

And of the Harlem River mortgage and of any other party to this proceeding while Penn-Central is being consummated so as to give the New Haven the benefit of this special relief which Penn-Central has agreed to go through with in its brief before this Court.

We submit —

(Inaudible)

Joseph Auerbach:

Merger sir and the filing of the documents which are due on December 26.

(Inaudible) saying that the approval of — in the Court proceedings (Inaudible)?

Joseph Auerbach:

Yes sir.

(Inaudible)

Joseph Auerbach:

Current estimates, those are referenced here today by Mr. MacDougall is that we will not have more than $2 million of cash by December 31 of this year, our payroll and materials and supplies cost which are basic barebones cost are a $1,750,000 a week.

The first week in January, we have equipment obligations and equipment obligations are protected under the Bankruptcy Act, so that we must say to the Court this time that the first week in January is when we ran out.

The —

(Inaudible)

Joseph Auerbach:

There are four types of issues which the bondholders can raise as to which we say there is effective judicial protection no matter whether you — that if you permit the Penn-Central merger to go ahead.

The first is, what is the value of the New Haven’s estate that cannot be effectively reviewed and can they have the benefit of judicial sanction or judicial mandate of a figure other than that found by the Commission.

Joseph Auerbach:

Well, the Commission on November 16 has already found evaluation.

That is now in existence, they filed a vote for purposes of Section 5 (2) of the Interstate Commerce Act at the purposes of Section 77.

Under 5 (2) they must find fair inevitable — fair terms and under Section 77, they must find fair and equitable terms.

Under Section 77, they’re charged with the function of valuing the railroad.

They’ve done it.

Now, what happens if the bondholders appeal that valuation and I will assume they will just of the very essence of the Commission’s findings of value.

What happens whenever the Commission finds a value in Section 5 (2)?

William J. Brennan, Jr.:

May I ask Mr. Auerbach.

Is your answer to Justice Harlan, does that imply that the — this case must be decided by the first week in January if the New Haven is not to blow away?

Joseph Auerbach:

I don’t really know how to answer the question Mr. Justice Brennan.

I don’t want to be in the position of saying we’re blackmailing everyone in the east including this Court.

At this point in time, we filed a report with the reorganization court which its trustees we felt obliged to do.

That report was filed a week ago and at that time, we thought we had $500,000 of Department of Transportation money.

We now find we’re not going to have that.

In the meantime, we’ve talked to the State of Connecticut and we’ve asked them if they would stand biased.

The State of Connecticut in particular because they have a Department of Transportation and hence the constitutional and legal issues that may arise with New York or Massachusetts or Rhode Island may not exist in the case of Connecticut.

They’ve indicated to us, they’ll do everything they can.

I don’t know how to answer it Mr. Justice Brennan except to say that at this moment in time, we have no source.

Now, it’s true that the states in the past and the current — in current years have helped us in an extent 6 million odd dollars a year.

If Connecticut has the legal power to give us some money during the first week in January to tie these all whether this Court acts, of course we’re going to take it.

Our other source, our only other source is this.

In the registry of the Court as a consequence of sales of property, there is some $7 million.

The Court in the past has indicated and this of course is subject to the lien of the bondholders because it was their property that was sold.

The Court has indicated in the past that it would not receive favorably attempts by the trustees who indicated to the Court that they might be forced to do this, to have a release of those funds for operating purposes.

I can assure this Court however that it — at last resort, the trustees will go back to the reorganization court to attempt to get a release of so much of those moneys as we keep this road going until this Court has acted.

But we have no assurance in that respect either.

Hugo L. Black:

May I ask you this question, I assume from what you say is that New Haven is losing money in a very, very rapid range.

That’s right, isn’t it?

Joseph Auerbach:

Mr. Justice Black, this year, we’re estimating that it will have a deficit in net railway operating income of $20 million.

Hugo L. Black:

What is going to go with that when they get — with these few measures?Will they still be losing that much money?

Joseph Auerbach:

No sir.

Hugo L. Black:

Why?

Joseph Auerbach:

We have very close relationships from an operating point of view with both of these railroads.

For example, Grand Central terminal in New York is shared by the New York Central and the New Haven railroads.

They share the expenses, their car inferences which were in the ratio of approximately 55 to 45, the basis for the allocation of expenses and income from the so-called Park Avenue Real Estate properties.

We share Pennsylvania station with the Pennsylvania railroad.

We own a railroad called New York Connecting, which has as its only function to link up the New Haven and the Pennsylvania.

We own that 50/50 for the Pennsylvania railroad.

We share stations with the New Haven — with the New York Central at Springfield and Worcester and Boston at south station and Back Bay station.

We’re the — we’re almost a bridge between those two railroads today.

Now all the estimates and there have been several expert presentations in this respect including that of the Penn-Central, our own, and some of our bondholders are that New Haven as part of Penn-Central can save over $5 million a year in operating cost.

So to that extent Mr. Justice Black, the deficit is reduced.

Hugo L. Black:

How much is it losing now?

Joseph Auerbach:

This year which is a extraordinarily bad year, we estimate a deficit in net railway operating income of $20 million.

However, last year, it was less than half of that amount.

Hugo L. Black:

But who is going to absorb that loss?

Joseph Auerbach:

These operations will be Penn-Central operations and they will have to conduct our operations.

Commission has said, both passenger and freight.

So that the — to the extent that one could subsequently define those losses or pick them out, they will be Penn-Central losses.

Hugo L. Black:

That would take money away from some of the other railroads?

Joseph Auerbach:

Well, I don’t know about the other railroads Your Honor, but it certainly will take money away from the stockholders of Penn and Central.

Hugo L. Black:

(Inaudible)

Joseph Auerbach:

It will be just an integral part of their operations Mr. Justice Black.

Hugo L. Black:

(Inaudible)

Joseph Auerbach:

The — I started to say to the Court that there was — there were certain fundamental issues as to which we felt there was effective judicial review.

One was the amount of the total value of the New Haven as to which findings have already been made.

If that on appeal should be reversed, should be remanded, should be increased, the Commission has jurisdiction to change it.

Second, the amount of this interim sharing by Penn-Central during the period between New Haven’s — between the date of merger and New Haven’s inclusion of that merger, Penn-Central’s brief before the Court says they recognize they could be charged with a greater proportion if the bondholders on appeal convinced the Court that the Commission treated them too lightly.

These are — these go to quantum of consideration.

All of these and they’re other questions of quantum of consideration.

Joseph Auerbach:

The trustees believe that all of these have effective judicial review available as a remedy.

We find nothing and anything our bondholder say including the technique of the loans as presenting a problem if Penn-Central should merge and thereafter the Commission has to change these terms.

The Commission has a general reservation of jurisdiction and it has specific recognition by Penn-Central as to quantum in their brief.

The only remaining thing is, our bondholder say, there are to be traffic protection as well, all are Appendix G in the case of D & H and Erie-Lackawanna and B & M.

The Commission has denied that, but even in denying it have said that they’ve got authority to compensate for it as part of the quantum of consideration.

Accordingly, we submit to the Court that the circumstances are such that whatever maybe the rights of the bondholders of the New Haven, and of course this is not a forum to determine those rights at this time, whatever maybe those rights, there is adequate judicial sanction which would permit the Court to make such changes as might be deemed necessary if the Commission is in error.

If the Commission is not in error, however, and the Court now enters a stay based on these arguments of our bondholders, we have the anomaly of frustrating the very objective which they presumably would seek with us, that is to preserve the New Haven.

Earl Warren:

Mr. Cox.

Hugh B. Cox:

Mr. Chief Justice, may it please the Court.

I appear in this case for the New York Central and the Pennsylvania.

The interest of my client by the course primarily in affirmance of so much of the judgment below as it allows immediate consummation of the merger.

And I propose in the time that has been allotted to me to devote my attention primarily to the arguments of those parties who are seeking to defer immediate consummation of the merger.

Now, I am obliged to say to the Court in candor that I think most of the arguments that can be made on this aspect of the case had been touched upon in one way or another.

I propose in general simply to state our position in summarily as I can with reasons for it.

And if there are any questions from the bench, I shall do my best to answer them.

Now the objections to immediate consummation come largely from two groups.

I say largely because that hasn’t been qualified but the two groups who are largely objecting to immediate consummation are first, the bondholders of the New Haven, not the bondholders of the Erie represented by Mr. Fooshee, but the bondholders of the New Haven.

And I propose I think to deal first with their contention.

Now despite the complexity of their argument and some of the irrelevancies with which I think it is counting, I think their basic position can be stated quite simply and I think answers them.

Their basic and ultimate position is that this merger should not be consummated until the Penn-Central agrees to absorb all of the operating losses of the New Haven for the period that must elapse between consummation of the merger and the final completion of the bankruptcy proceedings and actual physical and legal inclusion of New Haven into Penn-Central.

Now they state that in different ways, they sometimes describe it as interim inclusion, of course it isn’t inclusion at all really.

They sometimes talk about a lease or about an operating agreement.

But it all comes back to the proposition that the Penn-Central should absorb all of those losses in this area.

Now they’ve had a hearing on this question before the Commission as Mr. Auerback explained to you, a hearing in the New Haven Inclusion Case.

And the Commission recognized that there should be some arrangement to sharing these losses.

But the Commission declined to require Penn-Central to absorb all the operating losses and it made findings and stated reasons for that.

It found in the first place that, of course under any interim arrangement of this kind, Penn-Central will not have the power of an owner.

It can’t deal with and dispose the property the way an owner can and therefore, it would not be in a position to achieve the kind of operating economies and efficiencies that can be expected after inclusion.

And since its power would be limited in that way, the Commission said — thought that that was a reason for not requiring it assume all these interim losses.

It’s a — I think a reasonable proposition.

Hugh B. Cox:

You don’t have a complete power to manage and you shouldn’t have complete responsibility with the losses.

But the Commission then went on to a second point which is quite important and say — pointed out that if the Penn-Central should be required to absorb all of these operating losses, the bankruptcy law and the bankruptcy statute being what it is, the litigation among the parties to this bankruptcy proceeding could proceed endlessly.

They would have no incentive to impose their differences or to terminate that litigation because their position would be preserved for all this period of time went on.

The Penn-Central will be paying the operating losses.

The Commission therefore found that it — and stated it in just about these words in this November 21st opinion.

It said we think that we can best accomplish our objective which is prompt inclusion of the New Haven into Penn-Central in that real sense.

If we require all the interested parties to share in these losses, that will give everybody an incentive to compose the differences and to litigate with expedition and get this proceeding terminated.

And accordingly, it provided for a sharing of the losses.

This whole arrangement last for three years because that was an estimate of the party that what might be required for the bankruptcy proceeding and the Commission applied the formula of the operating losses to determine what losses should be shared and made an order that required the Penn-Central to take and absorb 100% of the losses in the first year, 50% in the second year and 25% in the third year with a ceiling on the total amount this year to be required and to be sought.

Abe Fortas:

But Mr. Cox, do we have to pass on that or —

Hugh B. Cox:

No.

Abe Fortas:

Now, will you explain that?

Hugh B. Cox:

The order that the Commission — which the Commission did this.

An order was made in the New Haven Inclusion Case and the courts can do — can be and doubtless will be reviewed before a three-judge court in the usual way.

And as Mr. Auerback points out of course, upon that review, the Commission — the orders remanded to the Commission, the Commission has to fix terms (Inaudible) owners on the Penn-Central.

The Penn-Central having consummated the merger if it’s allowed to do in the meantime will be bound by those conditions as a result of the Commission’s original order.

But I don’t think that there are — I’m quite clear that the reasonableness of the Commission’s action in an Inclusion Case is not before this Court at this time to review and I mentioned it simply to show that this basis of which the bondholders of the New Haven are asking to have the Penn-Central merger held up.

It is a basis which has been reviewed by the Commission which has been passed upon by the Commission and is to which they can get judicial review and as to which they will not be prejudiced if the merger is allowed to be consummated as judge — as the court below held.

That’s the —

Abe Fortas:

Does — do they make any point in which in your judgment of the bondholders of the New Haven make any point which in your judgment does not fall within that category?

And if so I —

Hugh B. Cox:

I think —

Abe Fortas:

— would like (Voice Overlap) —

Hugh B. Cox:

I think not in my judgment Your Honor.

I think that there are rights — they argue of great many things but I think they all can be subsumed under the propositions I have stated to you.

Now, I should like to leave if I may the bondholders of the New Haven at that point and start to talk about the argument of the Norfolk & Western which one of their arguments which is that even if the inclusion order is affirmed, the Penn-Central merger should not be consummated this time because one or another of the three railroads are there because of action of their managements or their stockholders, principally the stockholders they speak of, will not accept the terms for inclusion in the N & W that have been prescribed by that order.

Now I really think that I should not — I don’t intend to spend much time on that argument.

I simply should like to say this, that as we — I submit that the responsibility of the Commission under the statute and under its own findings in the first case, and I say under the opinion and mandate of this Court on the previous people, are satisfied and completely satisfied if the Commission gives each of these railroads an opportunity to be included in a major system on the basis of terms described to stare in which you affirmed on judicial review.

Now if one of these railroads or two of them, the managements, the stockholders in pursuit of their private interest decide to reject these terms, I submit that that is not a reason for holding up this merger or rejecting the Commission’s findings that the consummation of the merger is in the public interest.

And I submit that any other view of the matter would put the exercise of regulatory authority completely at the mercy of private interest.

Hugh B. Cox:

Now that seems to me to really should, I submit, dispose of the argument that is made which rest on the assumption that the inclusion order will be affirmed.

Byron R. White:

(Inaudible) required with the public interest to make it — exist independently in placing their merge to Penn-Central.

Hugh B. Cox:

Alright, I find — I take this position even so Mr. Justice White.

I think the Commission, if they decide that they will not take the opportunity that the Commission has given them, the Commission can’t force them into a system —

Byron R. White:

(Inaudible)

Hugh B. Cox:

— and on the other hand, I don’t think they should be allowed to force the Commission or the courts for that matter to hold up a merger which is otherwise has been found to be an (Voice Overlap) —

Byron R. White:

But that the court last term, based on its understanding that the roads were essential to public interest and that the — if they couldn’t survive alone, didn’t the Court say to them, the merger shouldn’t go forward to — at the expense of those roads?

Hugh B. Cox:

If — I think the Court held that.

But I think the Court is not explicit, it is implicit in the — what the Court held.

What the Court’s holding was directed to as a public responsibility of the Interstate Commerce Commission.

I suggest if I may, that I do not read the Court’s opinion of holding that if the stockholders of one of these roads for private reasons refused —

Byron R. White:

They don’t have the right to stay independent.

Hugh B. Cox:

They don’t have the right to stay independent in that sense, that’s right.

Byron R. White:

Penn-Central —

Hugh B. Cox:

Or they do so at their own account.

Byron R. White:

Penn-Central, by merging can force them to merge with somebody else.

Hugh B. Cox:

They do so.

They remain independent, their own peril.

I think that’s right.

Byron R. White:

And the private — public interest (Inaudible) use the private reserves.

Hugh B. Cox:

That — if they decide to commit suicide, the public is deprived of their service.

Now that’s a harsh result.

You don’t have that result, they can — they control this.

Of course I’m not suggesting that it will happen, I understand.

I’m putting this in terms of what seemed to me to be the legal principles but a notion that these roads are going to commit suicide is one that I think the Court need to accept.

Byron R. White:

And that result is though that the roads have no right to stay as independent entities if the — if they (Inaudible) —

Hugh B. Cox:

Well —

Byron R. White:

— which is going — it would be public interest of the merger, the merger overrides their rights to the —

Hugh B. Cox:

That’s right.

They have — of course they have a right to stay independent which they do so at their own risk.

Hugh B. Cox:

If they can’t work out an arrangement if they can’t survive, Mr. Silleck seems to think the two of them will survive even as independent.

Byron R. White:

This is really a forced merger?

Hugh B. Cox:

It’s a kind of — the public interest in the larger merger creates the situation where something has to be done with these lines and the only — the thing that the Commission can do is to provide an opportunity for them to become members of a larger railroad system.

I think that seems to me harsh as it is to be a — of the result that’s contemplated by the provisions of Interstate Commerce Act.

Abe Fortas:

Its not harsh unless (Inaudible) — harsh, Mr. Cox, unless you attack different significance to the words that they have a right to remain independent and I would do it, that is — they have a right to remain independent if they can cut the mustard, I think, and manage to do it as an economic matter, but nothing else and what the Government as I understand the theory, doesn’t have the right, doesn’t have the duty to assure that they can stay in existence to make money.

Hugh B. Cox:

That’s precisely right, precisely right.

Hugo L. Black:

Mr. Cox, can I ask you a question?

I’m not quite (Inaudible) preserving the New Haven railroad, is that thought of preserving the New Haven railroad as such at its actual value (Inaudible) what seems to be inflated by this on the bonds.

Hugh B. Cox:

Mr. Justice Black, this is a subject to which I am not in the authority but I understand that what the Commission valued as the Commission fixed for including the New Haven in the Penn-Central was its — what the Commission found to be its actual liquidation value today.

What it would — what you would get —

Hugo L. Black:

What did they find at (Inaudible)?

Hugh B. Cox:

Sorry, I can’t give you the dollar figure but —

Hugo L. Black:

Can somebody tell me what (Inaudible)?

Hugh B. Cox:

$125 million, that’s what the —

Hugo L. Black:

I asked the question because it seems to me that if the railroad losing as much as it’s losing.

It seems to be inevitable for this long continuing thing must be overvalued.

How could it (Voice Overlap) —

Hugh B. Cox:

Well, the — the Commission —

Hugo L. Black:

(Inaudible)trying to go broke down the rope and consume all of it, the bonds and everything else.

Hugh B. Cox:

The bonds made the securities maybe overvalued.

What the Commission did Mr. Justice Black was to fix the value on the basis of what you would get for the property if you sold it in liquidation today.

They went out of business, what do they get for it.

Now, I frankly have to say that the evidence that supports that determination is not before the Court in this case because that question of valuation isn’t here.

Hugo L. Black:

What I don’t quite understand is — if I understood the railroad, the necessity for it to survive, this isn’t based on the necessity of the bondholders, it’s the stockholders getting that full value on what they think this is worth today even though it’s a failing railroad.

Hugh B. Cox:

Well, that of course is in part our position.

They can’t necessarily expect to get the full value of what it’s worth today.

And — but that again is not a question that’s involve the case before the Court today, I think, that will be determined in the bankruptcy proceedings and in the Inclusion Case which was —

Hugo L. Black:

Does it seem to be involved to the extent that we are urged and act — and to act instantly in order to save a railroad on its present financial setup.

Hugh B. Cox:

Well, I think what you’re being urged to do by the New Haven trustees Mr. Justice Black is to act promptly to save the transportation facilities of the railroad not the stockholders and the bondholders.

Hugo L. Black:

Is that the basis of the Court — the Commission findings?

Hugh B. Cox:

That’s the basis of the findings.

Hugo L. Black:

It is not based on the other.

Hugh B. Cox:

Not based on the other, its desire to preserve the transportation facilities of New Haven.

Hugo L. Black:

But it wouldn’t be done there on the — is that a finding consistent with this belief that they’ve done that on the basis that they’ve got to preserve by going — the evaluation is now put on this on the basis of its bonds.

Hugh B. Cox:

Not on the basis of the current market value because I think of the securities.

I think it’s on the basis of a liquidations act.

Hugo L. Black:

Quite a difference than the necessity to preserve a railroad about your system in the part, the contribution to the national railroad system and to preserve a railroad in order to be preserved — inflated value to stocks and bonds.

Hugh B. Cox:

Right.

And the Commission acted on the first basis, not on the second as I understand it.

I think that’s quite clear on the plan.

William J. Brennan, Jr.:

The respective rights, whatever they need maybe of the various securities of the New Haven.

Will all of — after this merger is consummated be reflected in a new security whatever is the bankruptcy court takes over, is that it, after the plan of reorganization goes through.

Hugh B. Cox:

Well, if the plan of reorganization goes through apart from these — to the consideration which will be received, will be stuck in the Penn-Central.

William J. Brennan, Jr.:

Yes.

Hugh B. Cox:

I think there are some other considerations involved but —

William J. Brennan, Jr.:

But it will be in the bankruptcy court where the respective interest in that stock will be determined —

Hugh B. Cox:

That’s right.

William J. Brennan, Jr.:

— isn’t that it?

Hugh B. Cox:

That’s right.

William J. Brennan, Jr.:

And all — what the ultimate result of this is that Penn-Central takes over some kind of operating facility whatever its value maybe and all the risks of property loss on its operation as part of the integrated new Penn-Central system, is that it?

Hugh B. Cox:

That’s quite correct.

They will — the deficit then will be born, if there is one, the operating deficit will be born by the merged company.

It will be up to it.

William J. Brennan, Jr.:

I take it Penn-Central must — judgment must be that there are other values even if it’s losing operation, to the merger which makes the merger roll — overall of their best interest, is that it?

Hugh B. Cox:

The answer to that is yes, of course, it wouldn’t be prepared to go forward but then if they didn’t create the whole transaction (Voice Overlap) —

William J. Brennan, Jr.:

As I understand it, whatever this arrangement is now, Penn-Central can’t get out of it.

Hugh B. Cox:

They can’t get out of it if they —

William J. Brennan, Jr.:

What (Inaudible) —

Hugh B. Cox:

— if they consummate the merger.

William J. Brennan, Jr.:

That’s what I — if the merger is approved, it must go forward and whatever the result, Penn-Central is stuck with it, is that it?

Hugh B. Cox:

If the — it’s stuck with it in this sense in the —

William J. Brennan, Jr.:

Suppose it’s — suppose it was a review of it, of this recent order —

Hugh B. Cox:

Yes.

William J. Brennan, Jr.:

— I should see, and could happen I expect that the Commission might be reversed and then they go back to the Commission for something else, something better for that, what’s Penn-Central’s position then?

Hugh B. Cox:

I understand that having consummated the merger, you have the Penn-Central — two companies involved by that Act, it would be found by any conditions that the Commission fixed or — originally or on remand under Section 5 (2) (d) of the Act to be so far as this New Haven situation is concerned.

I now should like to — there’s one other point that I should like to deal with and that is the argument which I think can somewhat confused here, to what should happen so far as the merger is concerned in the event that the inclusion order should be found by this Court to be effective in certain respects and the Inclusion Case remanded to the Commission for further consideration.

I’m not suggesting that there is any infirmity in the inclusion order.

We didn’t litigate the inclusion order, my clients didn’t but either — before the Commission or before the Court, and we have an interest in it only insofar as it affects the merger.

But assuming that there is some infirmity in the inclusion order and that this Court should direct to remand, we submit that even so, the Penn-Central merger should now be consummated.

And I say that for this reason, that I think it is perfectly clear from the arguments here this morning as it looked clear from the papers I think of the parties in this case that what is left in the Inclusion Case, and this is true whether one or two lines payout.

What is left in the Inclusion Case is a dispute essentially in private, in character about how much money the N & W should pay for those lines.

And we submit that the merger itself, the Penn-Central merger need not and should not be held up even if there is a remand pending the resolution of that dispute over how much money the N & W should pay.

It is not necessary to hold up the merger to protect the three lines that are involved, the three smaller railroads because they are now protected by the perfected Appendix G conditions and not one of the three railroads is challenging those conditions in this Court.

It seemed to regard in these sets of fact.

The N & W has not pointed in anyway which it would be prejudiced if there is a remand on how much money it should pay for the three lines and in the meantime, these mergers consummated.

It will still be able to make all of its arguments about how much money it should pay and it can get judicial review with those arguments.

Our definition in the courts will not be affected in anyway by the consummation of the merger.

So far as concerns what is really the essential of the question of public interest in this case, it seems to me perfectly clear that the Commission has decided.

Clearly as it can to be decided in finding — with these findings that are imperfect in any respect, there the imperfection does not affect the substance that these three railroads if they’re willing to go, belong so far as concerned to public interest, in the N & W.

The Commission found that inclusion in the N & W was preferable to inclusion in Penn-Central.

The Commission found that there was a better chance of preserving their transportation facilities if they were included in N & W than they would be if they were included in the Penn-Central.

It seems to me that the criticism of the Commission that it didn’t make a finding that there was no — the — wouldn’t be in the public interest to include them in the Penn-Central is really in the circumstances kept because I think the Commission is not only in the respects I have indicated but in other respects has made it abundantly clear that in its view, these railroads belong in the N & W system and what we have left here is simply a quarrel over how much money they — N & W should pay or how much money they should get.

And I submit to the Court that there is no reason why the Penn-Central merger cannot be consummated and that question of money which is essentially a private question be litigated after consummation.

Byron R. White:

Mr. Cox, do you mean that a reasonable minded businessman in one of the three roads shouldn’t really anticipate that he has much of a chance of getting in the — getting into Penn-Central.

Hugh B. Cox:

That’s precisely what I mean.

Byron R. White:

And that he reads the Commission orders and pays full attention that the — his options have been considerably reduced by the (Inaudible).

Hugh B. Cox:

That’s precisely what I meant.

And in the second or the first report on reconsideration, the Commission said, the D & H at that time asked for some change in the Appendix G conditions that they find that would be in the public interest to — included in that — in Penn-Central if it wasn’t included in N & W.

And the Commission refused to make it and said, “We are not going to make any change in this Appendix which will open the way to the stockholders of anyone of these three railroads to refuse prescribed conditions for inclusion in the N & W while holding out for better terms in the Penn-Central —

Byron R. White:

But isn’t it —

Hugh B. Cox:

— the Commission has made (Voice Overlap) —

Byron R. White:

Then you make a reasonable argument that the — that it would — that if one of the options that was opened for these roads was still the — to turn it — turns — turned down these proposition and to go with the Penn-Central, then the Commission could not have approved the immediate consummation of the merger without violating the mandate of this Court.

Hugh B. Cox:

I am afraid I could — would not and could not accept that.

I would have another argument to make that event.

My time has expired, but I will say that I don’t think that question is right.

I think it’s perfectly clear they don’t have that option.

William J. Brennan, Jr.:

Mr. Cox, may I ask you this question.

As I recall it, at one stage of this very protracted proceeding, did not the Commission reserve for a year after any proceedings denying these three roads for —

Hugh B. Cox:

Yes.

Well —

William J. Brennan, Jr.:

— permission to N & W the right to come back and ask for —

Hugh B. Cox:

I say in their first order, they said that if the petitions for inclusion in the N & W were denied —

William J. Brennan, Jr.:

Yes.

Hugh B. Cox:

— then they could renew their applications in the Court —

William J. Brennan, Jr.:

Well, they gave actually — they gave a year —

Hugh B. Cox:

A year, I think (Voice Overlap) —

William J. Brennan, Jr.:

— did they not?

In which after the denial to apply —

Hugh B. Cox:

Apply, that’s right.

William J. Brennan, Jr.:

— to be included in Penn-Central.

Hugh B. Cox:

Yes.

William J. Brennan, Jr.:

What will happen to that?

Hugh B. Cox:

Well, see that — they have now — they have been granted the — in this — and the applications to go into the N & W has been granted and the Commission also provided that if they were granted, their applications for admission to the Penn-Central should be deemed denied.And I assume that subject to whatever happens to the inclusion order on review of those petitions and for inclusion to Penn-Central have been denied.

Earl Warren:

Very well, Mr. Cox.

Mr. Trienens.

Howard J. Trienens:

We’ve read at outset, we ought to make it plain just what the situation is on this right to petition in Penn-Central.

If D & H whether misguided or correct or whatever this businessman’s views are, whether sound or not, D & H turns it down and that means one third of the stock either doesn’t vote at all or votes against it.

If that happens, Boston & Maine has the absolute right to petition for inclusion into Penn-Central.

So this Penn-Central was quite —

Byron R. White:

That’s the provision of the inclusion order.

Byron R. White:

It’s the —

Howard J. Trienens:

The — it’s the double provision of the retention of jurisdiction in Penn-Central plus the conditions in the inclusion order.

Yes sir, it’s a combined effect of those two orders.

Byron R. White:

How about D & H.

Howard J. Trienens:

If the D & H turns it down, they do not have an absolute right to petition.

However, as in the case of CNJ, a mutual petition by Penn-Central and by the D & H, yes, and of course it was said that the — oh, D & H was never thinking of that.

The affidavit in the District Court which was in this record, indicated that Mr. Silleck said that Mr. Dumaine had in mind a New England system.

In addition to his idea of making the D & H part of a New England system, he said there are other plans that D & H might consider.

He said that possibly D & H should become part of the merged Penn-Central.

So there, they have that very much in mind.

Now I agree —

Abe Fortas:

But he wants us to affirm.

Howard J. Trienens:

Sure, he does.

He wants to — he wants this price fixed so that he can go and try and do better, that’s the claim on it.

Now, I agree with the Solicitor General that the hold up value, (Inaudible) the playoff value, the shopping around value is bad.

I agree that the portions of the Commission order that let them go as the Solicitor General says, for four years in the shop around, that’s bad.

And the Solicitor General says, he has sympathy for this problem.

Well, we don’t want sympathy.

We want Appendix G declared unlawful for letting this happen in contrary to the mandate of the Court.

What Appendix G does today is cater solely to the private interest.

The private interest of the stockholders as contrasted with running this railroad because the more traffic that’s taken away by Penn-Central, the more the stockholder interest is protected without regard to whether the railroad has the traffic to compete with Penn-Central or not.

It’s because Appendix G has no function other than to subsidize the shopping spree that it causes this problem.

That’s the evil of the Penn-Central order as it’s now set up.

Now last term, the Solicitor General said in response to this very indemnity pool that’s set up, to give the three smaller roads a permanent stay in the financial success of Penn-Central would be almost like decreeing their affiliation with the Penn-Central system and thereby giving that system a virtual monopoly in New England and New York.

This is what Appendix G does, puts them together.

It puts the stockholders in the financial pool with Penn-Central.

It doesn’t do much for keeping the traffic on the railroad, of course not.

But it isn’t — it serves only to protect these private interests.

Now the question here is why didn’t the Commission do what we all expected they do?

To determine the ultimate faith, determine.

Howard J. Trienens:

Can you get in Penn-Central or can’t you?

Not leave this thing to negotiations and petitions and all.

I want this Court to know that since we were here last, I have asked in both proceedings and these proceedings went separately before the Commission.

I asked them in the Inclusion Case, decide the faith, decide the — to foreclose Penn-Central.

I asked in the Penn-Central case, decide this.

In the Penn — in the Inclusion Case, I got this show, I said, “Oh that’s not an issue here.

We’re just talking about N & W”.

In the Penn-Central case, I got silenced.

This ship just passed the night.

This wouldn’t decide the ultimate faith of these roads.

It’s not enough to just provide an opportunity.

Come on in on these terms if you’d like to come.

They should’ve decided the faith of these roads.

Abe Fortas:

How do they do that?

Perhaps I missed you.

Howard J. Trienens:

How do they do that?

Abe Fortas:

Yes.

Howard J. Trienens:

Decide now that it’s going to be — well, here are the choices.

There weren’t that many choices.

They could come into N & W.

Either N & W or N & W (Voice Overlap) —

Abe Fortas:

That’s what they decided.

Howard J. Trienens:

Decided they could come in.

They decided —

Abe Fortas:

Yes, and — now wait, how do they go beyond that?

Howard J. Trienens:

They can decide that you — that Penn-Central is out for you folks.

Abe Fortas:

And would that satisfy you?

Howard J. Trienens:

If they had done that plus deciding that they wouldn’t be subsidized to the injury of the other eastern railroads during this long period.

Abe Fortas:

What you’re saying is that we’re ought to declare Appendix G unlawful.

Howard J. Trienens:

Yes sir, exactly.

Abe Fortas:

And if we did that then that would force these roads into the bosom of the N & W, is that right?

Howard J. Trienens:

If they had decided that Penn-Central should be foreclosed and if they have decided the form in which the N & W ought to take — to carry these roads and bear in mind that with this million and eight of operating savings which is peanuts in this business, there are great opportunities to make Erie a viable system in another form of N & W.

Abe Fortas:

Yes but in that way, you want them to get rather Appendix G — N & W is not a party to Appendix G.

It’s affected by them.

Howard J. Trienens:

We’re a victim.

We’re not a party to it.

Abe Fortas:

Well now —

Howard J. Trienens:

We’re a victim.

Abe Fortas:

It’s — you’re affected by it —

Howard J. Trienens:

Yes sir.

Abe Fortas:

— and now what you’re saying is that Appendix G ought to be eliminated and that means that these roads would be a subject of the siphoning of and diversion of traffic and then it have to go looking for somewhere else so they can get something to eat, isn’t that right?

Howard J. Trienens:

They go one place to the other and I would hope they would go to a deep place, the ultimate faith that this Court expected the Commission would decide for them in which the Commission keep saying, “Well, that’s something we’re going to look at tomorrow or we’re going to see some more petitions.

We won’t get to the ultimate faith”.

On closing, the Solicitor General says that it’s not the function of this Court to administer the Interstate Commerce Act and I fairly agree with that.

It is the function of this Court to see if an order is supported.

And if it’s found that the order is not supported as the District Court found in the Inclusion Case, the function of the Court is to set the order aside.

That’s — it was the District Court that failed to do that part of the judicial function.

It looked at what the D & H Board might or might not do and that’s one of the basic problems we have here today.

Now just one comment on the Boston — on the New Haven situation, these losses, I think one footnote should be added to the practical situation on the New Haven.

It’s true that when it’s included in the Penn-Central system, it maybe as that segment of the railroad are losing proposition still, I don’t know.

Well, I do know that Erie-Lackawanna interchanges a 100,000 cars a year with the New Haven right across the Hudson River and the Penn-Central when they get the New Haven will have the opportunity for the long hall to Chicago or wherever its going of those — any part of that 100,000 cars of the present New Haven-Erie traffic.

That’s the kind of practical situation where New Haven will benefit — where Penn-Central benefit.

Not merely by getting the New Haven as a separate short hall operation but that’s the kind of situation where the Penn-Central will be able to injure and then as the Commission found kill the Erie.

That’s the factual situation that causes that and that’s why Erie can’t live as an independent railroad.

Thank you.

Earl Warren:

Mr. Migdal.

Lester C. Migdal:

Mr. Chief Justice, may it please the Court.

The argument of the government and the trustees comes to this, that the Commission having determined that the continuation of New Haven’s railroad service, passenger and freight is in the public interest.

It is correct in assuming that it may require the owners of the railroad to sell the assets necessary for a continuation of these services.

That the Solicitor General and Mr. Cox and everyone else has recognized that it cannot compel such a sale and that the smaller railroads injured in these instances are not required to sell.

Lester C. Migdal:

Now what does that mean in this context?

It means that if you permit the Penn-Central merger to go ahead at this time, you will not save the New Haven service, you will destroy the New Haven service because the New Haven is presently owned by the bondholders whom I represent.

And those bondholders cannot consent in the light of the serious losses which are falling upon the New Haven.

They cannot consent to a continuation on extension of those losses not for another minute.

It is no good to them that you are going to erode these assets by borrowing.

It is no good to them that you are going to find the way for them to sustain these losses for three years.

None of that is of any use to them.

This merger if it goes forward today will destroy the New Haven and its operations because the Commission has made the mistake throughout and believing that it had the right and the power to compel the sale by the New Haven of its operations to Penn-Central.

It was a direct value — it was a direct violation of what this Court has said in the St. Joe Paper case.

And as Mr. Isaacs has pointed out, the method by which it was sought to be achieved was by requiring the continuance of loss operations, loss operations that Mr. Auerbach described to you as going on at the rate of 20 millions of dollars a year.

Now, it is not correct.

It is not correct that it remains in the public interest for this merger to go ahead even though the New Haven railroad will be destroyed as it must be destroyed and thus these bondholders for their own self-protection must take steps to destroy it.

In Penn-Central, it has been recognized or is in the public interest because it was including the New Haven.

But if you do not provide for taking up the losses of the New Haven simultaneously with the merger of Penn-Central, if that does not happen, then the New Haven will not nor should it be a sale.

These burdens have fallen now.

These public interest burdens have fallen now on the bondholders for six years in these sums which are extravagant and monumental.

Mr. Auerbach still cannot tell you whether Connecticut today will help take up some of those losses in this intervening period for which Penn-Central was going to lend us money and erode our interest.

The notion has been that the public interest must be served by the private sector, by these bondholders and we have served it to the point where we’re exhausted.

We will not serve it longer.

If the public interest will not — if the states will not come in, if Penn-Central will not come in, if somebody will not come in to take up these losses, the railroad will go down.

It ought to go down.

It is not a proper solution to put the burden of the public interest upon these bondholders.

And the Commission in all these cases from St. Joe on has never been able to compel a new — a railroad like the New Haven to accept a merger as a solution.

Thank you.