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Gibbons v. United States and Interstate Commerce Commission

decided: October 7, 1981.


On Petitions for Review of Directed Service Orders of the interstate Commerce Commission

Before Fairchild, Senior Circuit Judge, and Sprecher and Cudahy, Circuit Judges.

Author: Cudahy

The demise of a failing railroad parallels that of a patient with an incurable disease. The one dimension in which this comparison is most inapt, however, is in the measure of value of the respective corpora approaching, at and following death. Human remains however revered are of slight economic value. Not so the residual property real and personal of a once vital railroad enterprise. In the case of failing railroads, death (and the prospect of liquidation) confers value. The manner in which the corpus of an expiring (or expired) railroad is to be viewed for legal and economic purposes when subjected to "directed use" by a government agency furnishes the subject of this appeal.

On September 26, 1978, the Interstate Commerce Commission (the "ICC") concluded that the Chicago, Rock Island & Pacific Railroad Company (the "Rock Island") was "suffering from a lack of cash which (made) its continuing operations impossible in the face of national transportation requirements"*fn1 and directed the Kansas City Terminal Railway Company ("KCT") to provide rail service for traffic originating or terminating on the Rock Island lines pursuant to 49 U.S.C. § 11125(a)(1) (1979). The trustee, creditors and shareholders of the Rock Island seek review of that order and two additional orders*fn2 which extended directed service for a total of 171 days and denied compensation to the Rock Island for the use of its lines unless directed service resulted in a profit for KCT. Petitioners contend that in the absence of an unconditional rent agreement, directed service over a "cashless" railroad constitutes a taking of private property without just compensation in violation of the fifth amendment. Petitioners also challenge several supplemental ICC orders as invalid, arbitrary, unreasonable and contrary to law. These orders, issued to facilitate directed service, authorized KCT to repair and rehabilitate Rock Island tracks and equipment and to offset the expense of these activities against amounts KCT concededly owed the Rock Island for use of locomotives, freight cars and fuel. For the reasons set forth below, we conclude that no fifth amendment taking occurred here essentially because the ICC was fulfilling the Rock Island's common carrier obligation. Petitioner's objections to the supplemental ICC orders regarding repair and maintenance of the Rock Island lines and equipment are premature in the absence of a final accounting of the costs of directed service, and we express no opinion on these objections at this time.


A. History of Reorganization

The ICC's order directing service over the Rock Island lines was the culmination of a four and a half year effort to save a dying railroad. In March of 1975, the Rock Island filed a petition for reorganization under Section 77 of the Bankruptcy Act. 11 U.S.C. § 205 (1974). Despite the creditors' demands for immediate liquidation, the court determined that an income based reorganization of the railroad was not clearly impossible. The Rock Island continued to operate under the direction of trustee William M. Gibbons (the "Trustee") while attempts were made to formulate a viable reorganization plan for the bankrupt railroad.

In an effort to stimulate recovery, the court authorized substantial capital expenditures to repair the Rock Island's dangerously deteriorated track and equipment. The Trustee sought additional assistance from the Federal Railroad Administration ("FRA") but received a disappointing response. The FRA denied the Trustee's request for federal rehabilitation funds amounting to more than $130 million. The agency did, however, approve a priority loan of $17.5 million in 1976, and later authorized a subordinated loan of $33.5 million for equipment repair.

Unfortunately, these efforts did little to arrest the decline of the Rock Island. Between March 1975 and June 1979, the railroad suffered losses totalling more than $157 million. In July of 1979, the FRA conducted an extensive survey of Rock Island facilities. "Over 50 percent of the main line track was inspected and one quarter of that track was found to be below Class 1 standards, which by law cannot be operated. Equipment maintenance was found to be dismal." The FRA concluded that it could no longer grant waivers to its track standards to the Rock Island "since there (was) no prospect of the lines being brought up to minimum standards."

On August 28, 1979, the Brotherhood of Railway and Airline Clerks struck the Rock Island. Although the Trustee attempted to continue essential rail service using management personnel, substantial amounts of harvested grain which required immediate shipment could not be transported by the Rock Island.*fn3 The ICC met on September 18, 1979, to consider directing service by another carrier over the Rock Island lines in an effort to relieve a growing transportation crisis. The Commission determined that it needed more information and adjourned without taking action. Two days later, President Carter exercised his power under Section 10 of the Railway Labor Act (45 U.S.C. § 160) and appointed an Emergency Board to intervene in the Rock Island labor dispute. The striking workers were thus temporarily required to return to their jobs. When the Trustee refused to pay the prevailing wage, however, the employees refused to return to work. The United States subsequently failed to take action to enforce the President's order, and Rock Island operations were effectively shut down.

The Trustee appeared before the reorganization court on September 21, 1979, to report on the financial condition of the railroad. At that time, Rock Island creditors and stockholders argued that the strike had totally depleted the railroad's cash reserves and that the court could not constitutionally require the carrier to continue operations. The Trustee insisted that the Rock Island had sufficient cash to operate and succeeded in convincing the reorganization court that an income based reorganization was still not impossible. The FRA concluded, however, that the Trustee's financial analysis was "unreliable and unresponsive to the company's service obligations." Secretary of Transportation Neil Goldschmidt therefore urged the ICC to direct service over the Rock Island lines.

B. The Directed Service Orders

In order to protect the public interest in adequate uninterrupted rail service, the ICC has authority to direct a rail carrier (the "directed carrier") to transport traffic over the lines of another carrier (the "defaulting carrier") for a limited period (not to exceed 240 days) when the ICC determines that the defaulting carrier cannot transport the traffic offered to it because, inter alia, "its cash position makes continuing operations impossible." 49 U.S.C. § 11125(a) (1979).*fn4 The ICC then issues instructions to the directed carrier covering the handling, routing and movement of rail traffic on the lines of the defaulting carrier. The Commission is prohibited, however, from ordering service which would violate federal railroad safety standards or would substantially disrupt the directed carrier's own rail operations. 49 U.S.C. § 11125(b)(2)(A) and (B) (1979). The directed carrier is responsible for accounting to the ICC for the cost of direct service*fn5 but is entitled to government reimbursement for all expenses which exceed directed service revenue. 49 U.S.C. § 11125(b)(5) (1979).

On September 26, 1979, the ICC issued Directed Service Order No. 1398 which authorized KCT to provide rail service over the Rock Island lines for a 60-day period. The Commission based its order upon the finding that the Rock Island's cash position, independent of the strike situation, made continuing operations impossible. An estimated $30 million was needed to restore full service to the Rock Island following the strike, and this figure did not include "approximately $4 million in wages owed to employees for services performed prior to ... (the) strike, ... $22.4 million in invoices payable, $11 million of which (were more than) 60 days (overdue)" and an anticipated $35 million in costs of track rehabilitation necessary to comply with minimum federal safety standards. The Department of Transportation refused to provide additional federal assistance under the Emergency Rail Services Act and, without such aid, the Rock Island Trustee lacked sufficient cash to resume full operations "in time to meet the immediate needs of Rock Island shippers." Therefore, the ICC ordered KCT to service virtually all Rock Island traffic during the initial 60-day period with priority being given to commuter lines and grain shipments.

Instructions for implementing and administering directed service operations were also included in the Commission's order. KCT was required to compensate the Trustee for the use of available Rock Island locomotives, freight cars, fuel and maintenance equipment.*fn6 The order relieved KCT of any rent obligation for the use of Rock Island track and facilities unless the directed service operation proved profitable. The ICC had determined as a matter of policy that directed service confers substantial benefits on the defaulting carrier sufficient to discharge any rent obligation in the "usual" situation where a directed carrier's costs exceed the revenues generated by the service.*fn7 In the instant case, the ICC concluded that directed service would provide at least three major benefits to the Rock Island:

1) The Rock Island would avoid incurring any additional operating losses which would further impair the interests of the creditors and shareholders;

2) KCT would maintain and "possibly upgrade" Rock Island lines and facilities during the directed service period; and

3) KCT would assume employee obligations for those Rock Island employees hired to perform directed service.

In the highly unlikely event that KCT's directed service operations showed a profit, the ICC ordered KCT to reimburse the Trustee for the use of Rock Island lines and facilities.*fn8

Directed Service Order No. 1398 additionally allocated responsibility for the maintenance and rehabilitation of Rock Island lines and equipment. For the period of directed service, KCT was accountable for routine maintenance of Rock Island freight cars and locomotives*fn9 and for minor rehabilitation of Rock Island lines, rights of way, roadway structures and related facilities.*fn10 No substantial repairs could be ...

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