Justia Federal District Court Opinions

May a district judge presiding over a railroad reorganization, pursuant to Section 77 of the Bankruptcy Act,1 permit the Trustees of the railroad to discontinue a loss-producing service or must he withhold his authorization until the Trustees have applied to federal or state regulatory agencies for permission to terminate the service?

The State of New Jersey answers that permitting the discontinuance before administrative review would thwart any attempt to create a viable rail system essential to the economic life of the region. The Trustees of the Central R. Co. of New Jersey, by way of rejoinder, assert that denying the request for discontinuance could result in an unconstitutional taking of property. Resolution of this appeal requires this Court to address these contentions.

The Central Railroad of New Jersey (Central) is one of the many railroads² in the Northeast that is presently undergoing reorganization pursuant to section 77 of the Bankruptcy Act. The Central's lines, prior to entry into reorganization, extended from the Newark-Jersey City area in Northeastern New Jersey west to the northeast corner of Pennsylvania3 (the "hard coal region") and south to Southern New Jersey, ending near the Delaware Bay.

The majority of the customers served by the Central are located in the Northern New Jersey metropolitan area. In that region, the Central provides shipping services for industry and, more significantly for this appeal, carries approximately 25,000-30,000 riders a day.4 The vast majority of these riders are commuters who use the train to travel from western and southern suburbs into Newark or Jersey City. Many of these commuters continue to New York, using other public transportation facilities.

The State of New Jersey has for a number of years provided subsidies to the several railroads that transport commuters in New Jersey. Since the entry of the Central into reorganization in March, 1967, that railroad has received annual subsidies from the state ranging from a high of $5,100,000 in 1972 to a low of $4,400,000 in 1970. The granting of the subsidy has been made pursuant to contracts entered into between the railroad and the state acting through its Commuter Operating Agency. Many of the terms of the contracts are prescribed by statute. In July of 1972, the railroad and the state contracted for the Central to continue to furnish passenger service through June 30, 1973. The railroad was obligated to run trains according to an agreed upon schedule and compensation was to be paid by the state on the basis of the railroad's "avoidable loss" for the preceding year.5 Article Seventeenth of the contract provided:

"Each party reserves the right to cancel this agreement at the end of any calendar month upon 30 day's notice to the other party."⁶

Alleging that the subsidy paid by the state was inadequate to compensate the railroad, the Trustees petitioned the reorganization court for permission to exercise their right of cancellation under the contract and to terminate all their passenger services in New Jersey.

The district court, in an order dated December 20, 1972,⁷ based on an oral opinion delivered earlier,⁸ granted the Trustees' petition, and ordered termination of all passenger service as of January 21, 1973. The district court's order was appealed to this Court and a panel of the Court relying on a brief per curiam opinion permitting suspension of the Central's Pennsylvania operations,⁹ affirmed the decision of the district court.

The State of New Jersey and the Commonwealth of Pennsylvania¹⁰ filed petitions for rehearing before the Court En Banc. The petitions were granted and argument before the Court En Banc was had on May 23, 1973.^10a The termination of passenger service has been stayed pending resolution of this appeal.¹¹ Such resolution is now incumbent upon us.

The Trustees first contend that we must affirm the district court because the Court is bound by the doctrines of "law of the case" and stare decisis to follow its earlier decision permitting the suspension of service in Pennsylvania.¹² This contention is without merit, for it has long been the rule in this Circuit that decisions made in similar cases¹³ by panels of this Court are binding on other panels but are not controlling on the Court En Banc. Indeed, it is only through the Court En Banc that precedents established by earlier panel decisions may be reexamined.¹⁴

In addition, the Pennsylvania case is distinguishable from this appeal. The former decision authorized suspension of certain passenger services pending ICC action on applications for abandonment of such service, which action was arguably unduly delayed. In the present case, however, the Trustees have not filed applications with either the ICC or state regulatory authorities.

A review of the earlier decision must begin with an examination of the railroad reorganization statute and proceed to an explication of the relationship between administrative agencies and a district court supervising a railroad reorganization under that statute.

The decision to permit termination was made by the district court in December, 1972. At that time, the Trustees had not sought approval for the termination of passenger service in any forum other than the district court. No action had been commenced before the New Jersey regulatory agencies; no abandonment proceedings had been initiated before the Interstate Commerce Commission.¹⁵

A termination of passenger service is an action that may not fall squarely within the ambit of statutes which control abandonments of railroad lines or portions thereof.¹⁶ However, whether the termination is or is not denominated an abandonment, prior administrative approval appears mandated before a district court overseeing a reorganization may permit the discontinuance of an important component of a region's rail service.^16a

Section 77(o) provides that the district court may permit abandonment of "lines or portions of lines of railroad." It states in pertinent part:

"(o) The trustee or trustees, from time to time, shall determine what lines or portions of lines of railroad and what other property of the debtor, if any, should be abandoned or sold during the pendency of the proceedings in the interest of the debtor's estate and of ultimate reorganization but without unduly or adversely affecting the public interest, and shall present to the judge petitions, in which other parties in interest may join, for authority to abandon or to sell any such property; and upon order of the judge made after a hearing pursuant to such reasonable notice by publication or otherwise as the judge may direct to parties in interest, authorizing any such abandonment or sale, but only with the approval and authorization of the Commission when required by chapter 1 of Title 49, as amended February 28, 1920, or as it may be hereafter amended. . . ."¹⁷

As section 77(o) makes clear, if the railroad is subject to the jurisdiction of the ICC, no abandonment may take place without the approval of that agency.¹⁸

If the termination of passenger service is not denominated an abandonment, or if the Central's service is not subject to the purview of the ICC,¹⁹ the requirement of ICC approval mandated by section 77(o) would appear not to apply. Nonetheless, the district court may not be free to permit termination without prior administrative approval.

New Jersey has developed its own administrative agencies that regulate the conduct of certain railroads within the state. Approval of the appropriate agency is required under New Jersey law before any service may be discontinued.²⁰ If the approval of the state agency is withheld or unduly delayed, under a special provision recourse may be had to the ICC.²¹

The Supreme Court has explicitly stated that compliance with a state's regulatory program is required of railroads undergoing reorganization.

Palmer v. Massachusetts²² involved an attempt by the Trustees of the New Haven Railroad to terminate passenger service to eighty-eight stations in the Boston region. To effectuate such a termination, the Trustees, as required by state law, began proceedings before the Massachusetts Department of Public Utilities. While the state hearings were being conducted, the Trustees applied to the district judge supervising the reorganization for permission to carry out the same terminations. The district court, "ruled that Sec. 77 gave him the responsibility of disposing of the petition on its merits and, having taken evidence, gave the very relief for which the Trustees had applied to the Department and which was still in process of orderly consideration."²³ The U.S. Court of Appeals for the Second Circuit reversed,²⁴ and the Supreme Court affirmed that reversal.

In holding that the district court supervising the reorganization did not have the power to permit terminations in derogation of state regulatory procedures,²⁵ the Supreme Court, speaking through Justice Frankfurter, strongly emphasized the importance of preserving state control in the first instance:

"In view of the judicial history of railroad receiverships and the extent to which Sec. 77 made judicial action dependent on approval by the Interstate Commerce Commission, it would violate the traditional respect of Congress for local interests and for the administrative process to imply power in a single judge to disregard state law over local activities of a carrier the governance of which Congress has withheld even from the Interstate Commerce Commission, except as part of a complete plan of reorganization for an insolvent road."²⁶

It may be argued that the crisis now confronting the eastern railroads and the great changes that have come about in the economy generally, and to the railroad industry in particular, require a different result from that reached in Palmer. However, the blunt fact is that Palmer has not been undercut by subsequent decisions of the Supreme Court, nor has its vitality been called into question.

One aspect of Palmer v. Massachusetts has, in fact, been strongly reiterated in the New Haven Inclusion Cases.²⁷ There, the Supreme Court emphasized the important role of a regulatory agency, the ICC,²⁸ in the administration and resurrection of railroads in reorganization.²⁹

In the present case, the district court approved the termination of the passenger service without having required that the proposal first be submitted to an appropriate regulatory agency. Unless this case is not controlled by section 77(o) or Palmer v. Massachusetts, it would appear that the district court's action was not proper.

The Trustees contend that termination must be permitted at this time, without agency consideration. Such termination, they assert, is necessary to stop the financial drain on the railroad, which has risen to such magnitude as to be an unconstitutional taking of property.

Underlying the taking argument is the basic principle that an owner of property retains the right ultimately to withdraw that property from a losing venture.³⁰ Indeed, such a right appears to be a fundament of the taking provision.³¹ Operation of the passenger services, if not more adequately compensated, would, at some point, so substantially reduce the assets remaining in the railroad that the continuation would constitute a taking.

The Trustees might contend that a requirement that they seek relief now from the appropriate agency would result in further delay in termination and that any delay would exacerbate an already critical financial situation. They might further argue that the resort to New Jersey agencies would most likely provide only frustration, and therefore would be an empty formality.

However, the fact remains that the Trustees have not sought relief from the appropriate agency. There having been no application made, there can be no showing that delay³² or frustration³³ would be the inevitable result.

The cases of Brooks-Scanlon Co. v. Railroad Comm.³⁴ and Railroad Comm. of Texas v. Eastern Texas R. Co.³⁵ make clear that a railroad may not be required to remain in business in the face of confiscatory losses. Both of these cases, however, dealt with attempts by each railroad to leave the railroad business entirely. In the present case, the Trustees do not seek to abandon all their railroad operations. Rather they ask to terminate only the passenger service. In contradistinction to the situation now before us, the earlier cases involve attempts by the unprofitable venture to renounce their state-granted franchise completely. Here, the Trustees would have the district court permit them to select those aspects of their state-granted privilege they choose to accept without allowing the state to impose any further burden on the exercise of the privilege.³⁶

Further, these two cases do not decide whether in seeking to terminate a service, the Trustees may, with the approval of the district court, by-pass the state and federal administrative procedures.

In Brooks-Scanlon, the action underlying the case was an order of the Railroad Commission of Louisiana requireing a lumber company to operate its railroad on schedules approved by the Commission. With the Commission having already acted, and having mandated continuation of the confiscatory services, the Supreme Court held that the railroad need not formally petition the Commission for permission to terminate. The Court, through Justice Holmes, stated:

"[I]t seems unlikely that after the Commission has called the plaintiff before it on the question and against its strenuous objection has required it to go on, such an empty form cannot be required."³⁷

With the position of the Commission being clear, the Supreme Court could then state,

"Whatever may be the forms required by the local law it cannot give the Court or Commission power to do what the Constitution of the United States forbids, which is what the order and the injunction attempt."³⁸

In Eastern Texas, the railroad was attempting to abandon the intrastate service on the railroad. Interstate service had already been abandoned, after such abandonment had been approved by the ICC.³⁹

The Trustees here, however, have not sought any administrative review whatsoever. Thus, there can be no clear statement that the agencies would require service continued as is, that they would attempt to impose confiscatory requirements, or that they would not grant suitable relief.

Palmer v. Massachusetts clearly states that administrative agencies may not be disregarded.

"Continuance of state control over these local passenger services will, it is urged, impair the bankruptcy court's power to formulate a reorganization plan for the approval of the Interstate Commerce Commission. Such embarrassments due either to the time required for exhaustion of the orderly state procedure or to the financial losses that may be involved in the continuance of local services until duly terminated by the state, may easily be exaggerated. It is not without significance that after four years no reorganization plan for the New Haven has yet been evolved. Perhaps it is no less true that amenability to state laws will serve as incentive to the formulation of reorganization plans which, on approval by the Commission, do supplant state authority. But, in any event, against possible inconveniences due to observance of state law we must balance the feelings of local communities, the dislocation of their habits and the over-riding of expert state agencies by a single judge. . . ."⁴⁰

Therefore, this Court holds that termination of passenger service cannot be ordered by the district court supervising the reorganization of a railroad under section 77, unless such termination has been approved by the appropriate agency.⁴¹

This Court's holding does not preclude district courts from permitting ailing railroads to terminate services. Rather, it holds only that the reorganization court require railroads seeking terminations to follow certain procedures. Adherence to such procedures is not an exercise in formalism. Rather, such adherence reflects two important concerns. First, application to the appropriate state agency preserves the balance between federal and state powers in this field. Second, administrative review assures that an agency with substantial expertise, be that agency state or federal, will provide that the appropriate amalgam of public concerns for rail transport and private rights of property is achieved.

Having reached this result, however, the Court must express its disquiet over the plight of the bondholders of this railroad, and the other railroads whose reorganizations are being conducted by courts of this Circuit. In many respects, it is their equity which is being used to sustain these railroads. Such a situation is most unfortunate. The dissenting opinion paints a most graphic and colorful picture of this serious condition. Yet, this Court may provide such bondholders and other creditors relief only within the confines of Section 77, the enactment which encompasses the procedure mandated by the Congress, and the Supreme Court opinions interpreting that statute.

Were this Court not a judicial body but a legislative body, it could fashion perhaps a more equitable system for financing vitally needed yet inherently unprofitable rail services. Indeed, the time is rapidly approaching when both federal and state legislative bodies must squarely meet that responsibility. Such is not our prescribed role, however, as enticing as such assignment might be. Instead, our task is to apply the statute Congress has enacted unless such statute inexorably conflicts with the Constitution. The record in this case does not demonstrate that such conflict has happened here-at least, not as yet.⁴²

Therefore, the judgment of the district court will be reversed and the case remanded for proceedings consistent with this opinion.

APPENDIX

Statements by Trial Court Bearing on Question of "Taking"

". . . unless some way is found to fully compensate the debtor for its 429a

passenger operations that such operations of necessity must cease.

Otherwise we will run into an erosion of assets that will result in an

unconstitutional taking of the debtor's property." (Emphasis added)

"CNJ asks this Court to terminate the present subsidy contract as of 431a

December 31, 1972, and at that time to terminate all passenger services

of the debtor as of 11:59 p. m. on that date, unless, prior thereto,

suitable arrangements can be made with the State to continue the

carriage of passengers." (Emphasis added)

"Perhaps the parties should pay a little attention to the spirit behind 433a

that particular paragraph. Perhaps between now and the time the

cancellation becomes effective the parties can get together to the end

that perhaps this particular carrier can continue to operate both

freight and passenger service in the State of New Jersey."

"We cannot lose sight of the fact that some progress has been made and 439a

that conditions subsequent to March of 1971 have helped rather than

hindered the estate, and consequently those who hold security interests

in the estate."

"We have had some changes here, and they are all changes that I think are 440a

very beneficial, and will be of benefit to the estate generally. And I

have reference to a few of them that were mentioned here."

"And I could go on with a few others. But you all heard what they are. 442a

But they are all indications, they are all activity, they all indicate

that improvement is being made, that the condition of the railroad is

not too bad, insofar as the bondholders' security is concerned."ALDISERT, Circuit Judge, with whom WEIS, Circuit Judge, joins (dissenting).

I would affirm the order of the district court and reaffirm the action of the panel which first considered this appeal.1 I would hold that the reorganization court had jurisdiction to act and that its order did not constitute an abuse of discretion.

Because my approach differs substantially from that of the majority, it becomes necessary first to outline general contours of the crisis facing our nation's passenger rail carriers today. I deem such an understanding to be essential to the solution of the problem of this case.

As a legal essay the majority opinion appears sound. And it would have been acceptable if written some three decades ago when the railroads whose passenger lines run through this judicial circuit were a viable segment of private industry; at a time when the emergency federal financial subsidy legislation and the New Jersey state commuter's support legislation were not yet on the statute books. But this is 1973, and I believe that a 1973 federal court should look at this 1973 New Jersey commuter railroad problem from a 1973 perspective. This perspective includes a recognition of five critical factors:

1. Although only 13 per cent of all railroad mileage belongs to bankrupt railroads, essentially all of this is located in the Northeast. Some 80 to 88 per cent of all railroad trackage in the three states of this judicial circuit is in the process of financial reorganization.2 Once this fact of 1973 life is recognized, it strains credulity to accept the majority's implication that the Interstate Commerce Commission, a government agency charged with the supervision of these railroads, has the capacity or capability of bringing about a "resurrection of railroads in reorganization." (Majority 213.) Putting aside a spiritual miracle, that resurrection can be brought about only by federal and state financial aid. Although the majority seem unwilling to recognize this, the Congress and the New Jersey legislature have.

2. The majority approach this case as if the Rail Passenger Service Act of 1970, 45 U.S.C. Secs. 541-548 had never been enacted. That was a legislative declaration of national railroad policy proclaiming that inter-city passenger service would be forced to cease, unless federal financial assistance was forthcoming. Reasons cited for this crisis were competition from 90 million automobiles and multiple schedules of competitive jet air service which directly competed with passenger transportation.3 The decline of railroad freight business also diminished the passenger carrying capabilities of the railroads. Traditional railroad freight business was lost to inland waterway operations, pipelines and trucks. Moreover, government policy tended "to favor non-rail transportation and perpetuate a regulatory climate that [was] hostile to experimentation." Water, air and highway transportation were successfully aided through public investment, at little or no user cost while railroads had to make such investments on their own.4

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