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August 4, 1966


Before Schnackenberg, Circuit Judge, Campbell, Chief District Judge, and Decker, District Judge.

The opinion of the court was delivered by: Decker, District Judge.

Illinois Central Railroad ("IC") brings this suit to set aside an order of the Interstate Commerce Commission ("Commission"). Pursuant to 28 U.S.C. § 2284 and 2321-2325 the matter was tried before a three-judge court. The order, under § 5(2) of the Interstate Commerce Act, 49 U.S.C. § 5(2), authorized the Missouri Pacific Railroad ("MoPac") to acquire control of the Chicago & Eastern Illinois Railroad ("Eastern"), with the condition that Eastern then negotiate to sell to the Louisville & Nashville Railroad ("L&N") the Eastern Evansville line. The St. Louis Southwestern Ry. ("Cotton Belt") intervenes as a plaintiff; MoPac, Eastern and a stockholder of Eastern intervene as defendants. In addition, the Monon Railroad and L&N intervene as a plaintiff and a defendant, respectively, to argue that portion of the Commission's order dealing with the sale of the Evansville line.

Eastern is a comparatively short, bridge and terminal railroad running south from Chicago to East St. Louis and Thebes, Illinois, on the west, and to Evansville, Indiana, on the east. On a map its routes roughly resemble an inverted letter "Y." Its lines are in an "end-to-end" relationship with the lines of MoPac and L&N, neither of which now has access to the Chicago gateway over its own track. Eastern's lines are in a "side-by-side" relationship with the lines of IC, and if Eastern's lines are included in the MoPac and L&N systems, these two large railroads can for the first time compete with IC for substantial long line traffic over tracks entirely controlled by them.

In 1962, when the record in this case was made before a hearing examiner, Eastern was in serious financial difficulty. The examiner found that "practically every principal party in the proceedings herein predicates its individual interests upon convictions that Eastern's financial position is precariously weak, and that immediate substantial assistance is imperative to protect its ability to provide adequate transportation service."*fn1 The Commission found that control of Eastern by a major long-line railroad which had an interest in preservation of Eastern and modernization of its facilities would be in the public interest. Eastern's future as well as the interests of shippers and the development of a sound national transportation system were found to be better served by an "end-to-end" affiliation with MoPac than by a "side-by-side" affiliation with IC, one of Eastern's competitors.

Although these proceedings concerned authority to gain control, MoPac had already acquired substantial quantities of Eastern securities when the control application was filed in 1961. At the time of the 1962 hearing, the examiner found that MoPac and its parent corporation, Mississippi River Fuel Corp., were beneficial owners of the following proportions of Eastern securities: 17.2% of the common stock, 31.42% of the class A stock and 8.29% of the Convertible 5% General Mortgage Income Bonds.*fn2 Approval by two-thirds of the class A stock voted at a meeting was required for certain Eastern corporate actions (e.g., mergers, certain leases and certain sales of assets). Since less than 90% of that stock was voted at the typical Eastern meeting, MoPac had sufficient holdings to prevent the needed two-thirds majority support, and thereby veto proposed action.

Eight months after the major acquisition of Eastern securities, MoPac established an "Independent Voting Trust" into which all of the securities were placed, with instructions that "the trustee shall vote the securities of C&EI so that at all times * * * there shall, to the best of its knowledge, be entire independence of directors and management between MoPac and C&EI." Subsequent to the examiner's hearing, on February 20, 1964, MoPac acquired additional Eastern securities which were conveyed immediately to the trustee.

The Commission held that MoPac had illegally acquired some measure of control of Eastern by purchasing the class A stock and the veto power it carried without first obtaining Commission approval. Control of one railroad by another without Commission permission under § 5(2) is a violation of § 5(4) of the Interstate Commerce Act, 49 U.S.C. § 5(4); a common remedy is denial of the offending carrier's § 5(2) control application. However, MoPac's violation was held to have been comparatively minor and to have terminated upon creation of the trust eight months after the securities were acquired. The Commission held that control need not be denied in this case simply because of a § 5(4) violation in light of the great public benefit flowing from MoPac control of Eastern.

IC labels MoPac's § 5(4) violation flagrant rather than minor, and argues that the Commission made an error of law when it found the trust effective to insulate Eastern from MoPac control. IC claims that a proper evaluation of the seriousness of MoPac's violation in light of the legal inefficacy of the trust requires strict enforcement of § 5(4) and denial of MoPac's § 5(2) control application. While IC challenges the findings that shippers and the national transportation system will be served best by MoPac control, the primary thrust of the complaint is that the Commission acted arbitrarily on the basis of a mistake of law in holding MoPac's § 5(4) violation so trivial that the public interest required an award of control to MoPac rather than divestiture.

IC further argues that the Commission acted arbitrarily in refusing to reopen the record to receive evidence on two points: 1) alleged further MoPac § 5(4) violations; 2) Eastern's substantially improved financial condition since the 1962 hearing. IC claims that this case must, at the very least, be remanded to the Commission for further consideration in light of this proffered evidence.

Finally, the provision in the order for compulsory negotiations between Eastern and L&N for sale of the Evansville line is said to be beyond the Commission's legal power to enter.

We hold that the Commission did not err in finding the trust effective, that it did not clearly abuse its discretion in denying the petitions to reopen the record, that its provision for negotiations for sale of the Evansville line was legal, and that there is substantial evidence in the record in support of the Commission's findings. Therefore, we affirm the order of the Commission.


This case requires resolution of the conflict between §§ 5(2) and 5(4)*fn3 of the Interstate Commerce Act which arises whenever an applicant seeks authority to acquire control of a railroad in a situation where the applicant has already acquired some measure of control without prior Commission approval. While § 5(2) directs Commission approval of a proposed control transaction if it will be "consistent with the public interest," § 5(4) declares it unlawful to enter into such a transaction without § 5(2) approval. Denial of a § 5(2) application because of a § 5(4) violation may deprive the public of important transportation benefits; approval of a § 5(4) fait accompli rewards the lawbreaker. The Commission is not a stranger to this dilemma.

The Commission weighs a § 5(4) violation when it determines whether a control transaction will be in the public interest. In its leading case on this question, the Commission said:

  "The public interest is concerned not only with
  improvements in transportation service, but also with
  the maintenance of respect for and the observance of
  the law. If the Frisco is permitted to retain the
  fruits of its unlawful conduct, and we sanction such
  conduct, which we consider to have been in flagrant
  disregard of the law, others will be encouraged to
  pursue a like course and to present a fait accompli
  for our approval. Obviously, such is not in accord
  with the intent of the statute; i.e., that we pass
  upon `proposed' acquisitions of control prior to
  their consummation, including the justness and
  reasonableness of the terms upon which such control
  is to be acquired. If the indicated practice were
  generally followed, our administration of the statute
  in the public interest would be seriously hindered,
  if not defeated." Central of Georgia Railway Co.
  Control, 307 ICC 39, 43-44 (1958).

See also, Gilbertville Trucking Co. v. United States, 371 U.S. 115, 128-129, 83 S.Ct. 217, 9 L.Ed.2d 177 (1962). Where the statutory violation is flagrant, in open defiance of Commission authority, the public interest may require denial of a § 5(2) application. See e.g., Central of Georgia Railway Co. Control, 307 ICC 39 (1958); Buckingham Transportation Inc. — Control and Merger, 90 MCC 731, 741 (1962); Coldway Food Express, Inc. — Control and Merger, 87 MCC 123 (1961); Houff — Control, 80 MCC 637 (1959). However, where the evidence shows that the applicant acted in good faith, the public interest in strict enforcement of § 5(4) may be comparatively small. See e.g., Bringwald — Control, 90 MCC 11 (1962) (control acquired after consultation with ICC supervisor); Yellow Cab Co. — Control, 87 MCC 96 (1960) (violation of statute "resulted primarily from erroneous advice"); Gate City Transport Co. — Control, 87 MCC 591 (1961) (control acquired gradually by one truck-owner helping his ailing truck-owner friend). See also, Central of Georgia Railway Co. Control, 307 ICC 39, 45-46 (1958) (dissenting opinion).

The Commission applies a balancing test. The preference for denying control to violators of § 5(4) "will give way to a clear showing of public interest in approval." Gilbertville Trucking Co. v. United States, 371 U.S. 115, 129, 83 S.Ct. 217, 225, 9 L.Ed.2d 177 (1962); Central of Georgia Railway Co. Control, 307 ICC 39 (1958). Compare Buckingham Transportation Inc. — Control and Merger, 90 MCC 731 (1962), with DeBardeleben Marine Corp. — Control, 312 ICC 69 (1960). Thus, a mere similarity in the degree of flagrancy of a violation between cases does not dispose of the problem since the public benefits of control may be greater in one case than in another.

The Commission minimized MoPac's § 5(4) violation and maximized the public benefit flowing from MoPac control of Eastern:

  "The record makes it abundantly evident that, except
  for the limited veto power it possessed through its
  holdings of the class A stock, Missouri Pacific did
  not otherwise have power to control Eastern, and that
  it did not exert any apparent influence on Eastern's
  management, prior to or after the creation of the
  voting trust."*fn4

There is sufficient evidence in the record to support these conclusions. While neither the negative character of the control nor MoPac's self-imposed restraint are relevant in determining whether § 5(4) was violated, both factors may properly be considered in evaluating the flagrancy of the violation. The Commission considered them to be mitigating factors here.

Important to the Commission's conclusion that MoPac was not a flagrant violator of the law was the finding that the § 5(4) violation was temporary. The Commission was impressed by MoPac's conveyance of Eastern securities to the Marine Midland "independent voting trust." MoPac's purpose in creating the trust is recited in the trust agreement, as follows:

  "MoPac, without admitting that its purchases and
  ownership of shares of the capital stock of [Eastern]
  constitute control of, or power to control, said
  Company, wishes to avoid any questions or charges
  that have or may arise by reason of its ownership of
  such [Eastern] stocks; and to that end desires to
  place in trust any shares of capital stock issued by
  [Eastern] and purchased or otherwise acquired by
  MoPac, so that MoPac shall not be enabled, until such
  time as control by it of [Eastern] may be authorized
  in accordance with applicable provisions of law, to
  exercise any voting rights incident to any stocks of
  [Eastern] now owned or hereafter acquired by it."

The agreement requires the trustee to vote the Eastern securities independently, as follows:

  "The Trustee shall vote the securities of [Eastern]
  so that at all times during the continuance of this
  Trust Agreement there shall, to the best of its
  knowledge, be entire independence of directors and
  management between MoPac and [Eastern], and the
  Trustee shall not exercise the voting power of said
  securities of [Eastern] in such way as to its
  knowledge cause any dependence or intercorporate
  relationship between said two companies."

The drafters of the agreement attempted to create an irrevocable trust. The Commission described the revocation provisions of the trust, as follows:

  "The trust, during its term, is irrevocable, and is
  to remain effective until the occurrence of events
  specified therein, but none other. The stated events
  are (1) a sale of all the deposited securities (sales
  may be made only to persons not affiliated with
  Missouri Pacific), (2) the delivery to the trustee of
  an order of this Commission authorizing Missouri
  Pacific to acquire control of Eastern or to purchase
  any of its properties, or authorizing the release of
  the securities for

  any reason, or (3) passage of 10 years (ending April
  20, 1972)."*fn5

L&N used a similar trust for its substantial holdings of Eastern securities.

IC, agreeing that the trust agreement asserts irrevocability, argues that the trust was in fact and law revocable at MoPac's will. According to IC, MoPac had only to notify the trustee that the trust was to end and the full power to control Eastern residing in the class A stock would immediately revert to MoPac's hands. Since the power to revoke the trust is the power to obtain control of Eastern, IC claims that MoPac's § 5(4) violation never ceased and continues to this day.

Inasmuch as MoPac is settlor and sole beneficiary, this trust would normally come within the general rule summarized in the Restatement (Second), Trusts § 339, and followed in numerous cases:

  "If the settlor is the sole beneficiary of a trust
  and is not under an incapacity, he can compel the
  termination of the trust, although the purposes of
  the trust have not been accomplished."

See Restatement (Second), Trusts, Appendix § 339; Bogert, Trusts § 1004; 3 Scott, Trusts § 339. See e.g., Universal Carloading & Distributing Co. v. Railroad Retirement Board, 84 U.S.App.D.C. 188, 172 F.2d 22, 26 (1948); Moore v. First National Bank & Trust Co. of Macon, 218 Ga. 798, 130 S.E.2d 718, 721-722 (1963); Bixby v. California Trust Co., 33 Cal.2d 495, 202 P.2d 1018, 1019 (1949); Vlahos v. Andrews, 362 Ill. 593, 1 N.E.2d 59 (1936). See also, § 23, New York Personal Property Law, McKinney's Consol.Laws, c. 41 (1909, as amended 1951); Robinson v. New York Life Insurance & Trust Co., 75 Misc. 361, 133 N.Y.S. 257, 262 (1911); but see In re Mordecai's Trust, 24 Misc.2d 668, 201 N YS.2d 899, aff'd 12 A.D.2d 449, 210 N.Y.S.2d 478 (1960).

Defendants concede that this is the general rule, but they argue that "this maxim is not applicable * * * to a commercial trust designed to achieve a specific business purpose, particularly where other persons or entities have an interest in having the purpose fulfilled." The Commission and the public are said to have a "direct interest in having the purpose and terms of the trust carried out." Substantial reliance is placed on Hearst v. American Newspapers, 51 F. Supp. 171 (D.Del. 1943), where the settlor and sole beneficiary of a trust was not permitted to terminate his trust under extraordinary circumstances. IC, in response, relies on H.M. Byllesby & Co. v. Doriot, 25 Del. Ch. 46, 12 A.2d 603 (1940), in support of the general rule favoring revocability.

The trust was created on April 20, 1962; the Commission was notified of it in a petition for leave to amend MoPac's § 5(2) application on April 23, 1962. In effect, the Commission was asked to rely on the terms of the trust to absolve MoPac of any § 5(4) violation based on ownership of Eastern securities, and to find that the public interest was not endangered by MoPac's holdings. It may well be that having asserted irrevocability to the Commission to protect itself, MoPac was estopped from changing its position and asserting elsewhere that the trust was revocable. ...

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