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In re Chicago

*fn*: January 13, 1982.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 75 B 8999 -- Thomas R. McMillen. Judge.

Before Sprecher, Circuit Judge, Fairchild, Senior Circuit Judge, and Bauer, Circuit Judge.

Author: Sprecher

The question on appeal is whether the bankruptcy reorganization court erred in holding that net track retirement charges of the Chicago, Milwaukee, St. Paul & Pacific Railroad Company ("Milwaukee Road") were compensable and timely filed under the Milwaukee Railroad Restructuring Act ("MRRA" or "Act"), 45 U.S.C. § 901 et seq. Because we find that a fair construction of the statute fails to support the reorganization court's order, we reverse.


The Milwaukee Road filed for reorganization under § 77 of the Bankruptcy Act, 11 U.S.C. § 205, on December 19, 1977.*fn1 The railroad continued to sustain substantial losses, and only the issuance of trustee certificates permitted the railroad to borrow enough money to continue operating. On April 23, 1979, the trustee of the Milwaukee Road petitioned the reorganization court to embargo most of the railroad's trackage. On September 27, 1979, the reorganization court entered an order providing for the embargo of non-viable lines, effective November 1, 1979.

In an attempt to prevent or delay a cessation of rail service, Congress passed the MRRA on November 4, 1979. The Act provided for short-term funding of Milwaukee Road lines operating as of October 15, 1979, in order to allow exploration of proposals for employee and shipper stock ownership plans.

Under § 7(d) of the MRRA*fn2 funds for continued rail service were to be provided pursuant to the Emergency Rail Services Act ("ERSA"), 45 U.S.C. § 661 et seq. The ERSA provides for trustee certificates, issued by the railroad trustee and guaranteed by the Secretary of Transportation, which are treated as expenses of administration receiving priority in payment. The proceeds from the sale of the certificates are to "be used solely for meeting payroll and other expenses which, if not met, would preclude continued provision of essential transportation services by the railroad." 45 U.S.C. § 662(b)(1).

Section 7(d) of the MRRA provided that these certificate guarantees would supply funds for the continued operation of the Milwaukee Road from the date of enactment until the end of a sixty-day period commencing on the date of the occurrence of one of several events catalogued in § 22(b) of the Act.*fn3 Whenever one of these § 22(b) events took place, the reorganization court was authorized to permit line abandonments. A § 22(b) event occurred when, on December 31, 1979, the Interstate Commerce Commission rejected a proposed employee ownership plan. Thus, guarantees of trustee certificates by the Secretary of Transportation were to cease after sixty days.

Section 7(e) of the MRRA*fn4 provided that the Secretary should guarantee certificates in an amount equal to the difference between the total expenses attributable to the maintenance and continuation of service and the total revenues of the railroad. When the trustee petitioned the reorganization court for authority to issue trustee certificates to resume service on embargoed lines, certain secured creditors objected. One of their objections was that continued operations would depreciate physical facilities and thereby deprive creditors of value without compensation. The reorganization court, in Order No. 246, granted the trustee's motion, noting that the cost of maintenance as well as the cost of service was provided for under the MRRA. In Order No. 246A, the court "clarified" Order No. 246 and construed the Act to permit compensation based on income or loss as found on line 42 of ICC Form R&EI. This line included "net retirement charges" for non-depreciable property as an expense. "Net retirement charges" arise under standard railroad accounting practice dictated by the Interstate Commerce Commission. The value of track is not entered as an expense at the time of purchase, nor is it depreciated. Instead, the original cost of the track minus its salvage value is entered as a "retirement charge" when a line is abandoned.

The trustee and the Secretary entered into a financing agreement which, when amended, provided for $50 million in trustee certificate guarantees.*fn5 The trustee continued to operate the existing lines of the Milwaukee Road until February 29, 1980. On that date, abandonment of certain lines was approved by the reorganization court and the Milwaukee Road entered the original cost of the abandoned track, less salvage value, as a "retirement charge." Net retirements of $6,738.812 were entered on the books on February 29, 1980, and the trustee requested guarantees for trustee certificates totalling $56,803,362.

The Secretary of Transportation guaranteed trustee certificates totalling $50,000,000, but refused to guarantee the remainder. On December 2, 1980, the trustee filed a motion with the reorganization court to compel the Secretary to guarantee the additional $6,803,362. The Secretary opposed the motion, arguing that the "retirement charges" were not expenses within the meaning of § 7(e) of the MRRA and that the track retirements entered on February 29, 1980, had occurred after the sixty-day period specified in § 7(d). The reorganization court, while noting that the language of the MRRA supported the Secretary's position, ruled that the Act should be "liberally construed" in favor of the trustee. Thus, it entered Order No. 453 on February 18, 1981, directing the Secretary to guarantee another $6,738,812 in trustee certificates.*fn6 The Secretary appeals that order.



Section 7(e) of the MRRA requires the Secretary of Transportation to guarantee trustee certificates for the Milwaukee Road "in an amount equal to the difference between (1) the total expenses incurred by such railroad attributable to the maintenance and the continuation of service in accordance with subsection (d) of this section, and (2) the revenues of such railroad" (emphasis added). As the emphasized language demonstrates, the Act does not contemplate that every item classified as an expense will be compensated, but rather, only those which can be attributed to the continuing service mandated by the Act. We fail to see how "retirement charges," ...

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