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In re Chicago

decided: August 20, 1986.

IN THE MATTER OF CHICAGO, MILWAUKEE, ST. PAUL AND PACIFIC RAILROAD COMPANY, DEBTOR, APPEALS OF RAILWAY LABOR EXECUTIVES' ASSOCIATION, C.M.C. REAL ESTATE CORPORATION, CHICAGO, MILWAUKEE, ST. PAUL AND PACIFIC RAILROAD COMPANY, SEABOARD SYSTEM RAILROAD, INC.; SEABOARD SYSTEM RAILROAD, INC., AND RAILWAY LABOR EXECUTIVES' ASSOCIATION, PETITIONERS,
v.
UNITED STATES OF AMERICA AND INTERSTATE COMMERCE COMMISSION, RESPONDENTS



Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 77 B 8999--Thomas R. McMillen, Judge. Petitions for Review of Decisions of the Interstate Commerce Commission

Author: Easterbrook

Before WOOD, JR., and EASTERBROOK, Circuit Judges, and BARKER, District Judge.*fn*

EASTERBROOK, Circuit Judge.

The Soo Line R.R. bought the railroad operations of the bankrupt Chicago, Milwaukee, St. Paul & Pacific R.R. in February 1985 for $150 million plus the assumption of liabilities estimated at $420 million. The district court approved the Soo's bid even though the Chicago & North Western Transportation Co. (CNW) bid $360 million plus assumption of essentially the same liabilities, and even though the Interstate Commerce Commission had found both proposed acquisitions to be consistent with the public interest. The district court thought the Soo's bid preferable because the Soo planned to abandon less of the Milwaukee's track--abandonments that the district court thought might impair the country's military security.

The investors in the Milwaukee, not understanding why they should be required to contribute $210 million to the national defense, contend that the district court's approval of the sale "took" their property. They have asked the Claims Court, which under 28 U.S.C. § 1491 has exclusive jurisdiction of money claims against the United States arising out of takings, for relief. They ask us to set aside a paragraph in the district court's order that approved a finding of the ICC that the Soo's bid was constitutionally adequate, a paragraph that will impair if not preclude their suit in the Claims Court.

The Railway Labor Executives' Association (RLEA) challenges the sale, too, but on different grounds: it says that the district court did not impose sufficient conditions for the preservation of employment of the Milwaukee's employees. The RLEA also asks us to set aside an order of the ICC declining to review the Milwaukee's final plan of reorganization. Finally, the Seaboard Line wants us to set aside the district court's decision (and an order of the ICC) to the extent they allow the Soo to operate trains over the Seaboard's line between Bedford and New Albany, Indiana. These trackage rights enable the Soo to haul traffic from Chicago to Louisville, traffic the Seaboard otherwise might move.

Because the challenges to the sale are so disparate, we treat the facts pertinent to each challenge separately. Part I addresses the investors' constitutional argument, Part II the RLEA's arguments about protective conditions, and Part III the Seaboard's request to reclaim control of its track.

I

A

The Trustee of the Milwaukee managed its business for several years, paring unprofitable operations and refurbishing deteriorating track. The ICC and the reorganization court decided that the Milwaukee would not be a successful line if operated alone, so the Trustee put its railroad lines and related rail assets up for bids. Three bidders remained at the end: the Soo Line, the Grand Trunk, and the CNW. The ICC, whose approval was required under § 5(b) of the Milwaukee Railroad Restructuring Act, 45 U.S.C. § 904(b), and the Interstate Commerce Act, 49 U.S.C. § 11344, rejected the Grand Trunk's proposal. Chicago, Milwaukee, St. Paul & Pacific R.R.--Reorganization, Fin. Dkt. No. 28640, I.C.C.2d (Sept. 26, 1984). In the same decision the ICC expressed concern that the CNW's proposal would eliminate some competition (the Milwaukee competed with the CNW in many markets), while acquisition by the Soo would have a smaller competitive effect. It therefore proposed conditions that would have required the CNW to grant trackage rights, allowing other railroads to operate over its lines to furnish competing service. Chairman Taylor and Vice Chairman Andre approved the Soo's proposal but did not state their reasons (except to the extent they may be inferred from the ICC's exceedingly lengthy analysis of all the proposals). Commissioner Gradison favored the Soo's proposal only because it required fewer conditions; she thought the public benefits of the two proposals were otherwise equal. Commissioner Sterrett favored the CNW's proposal. The ICC "approved" only the Soo's proposal but noted that its failure to disapprove the CNW's left the reorganization court with the discretion to choose either.

One of the issues before the ICC was the adequacy of the consideration offered by the bidders. Both Soo and CNW offered some $150 million in addition to the assumption of debts. Chicago Milwaukee Corporation (since renamed CMC Real Estate Corp.), the entity that was to emerge with the Milwaukee's non-rail assets and the net payment from the winning bidder (and thus the representative of the Milwaukee's equity investors), objected that $150 million was too little. The net value of the railroad assets was at least $360 million, according to CMC. The ICC rejected the CMC's position for two reasons: first, the $360 million valuation was the result of discounting to present value an assumed flow of future earnings, a methodology the Commission thought unreliable; second, the value did not represent any actual bid that CMC was willing to accept. The ICC instead decided to value the Milwaukee's rail assets by looking for a multiple of current earnings. A bid of $150 million represented a multiple of 16.9 times the Milwaukee's current earnings and eight times its projected earnings for 1984. The multiple of 16.9 was almost twice the average of five large carriers reflected in stock market valuations in 1983. CMC's asking price of $360 million, more than 40 times current earnings, struck the ICC as unrealistic.

CNW then met CMC's "unrealistic" demand, offering $360 million (in addition to the assumption of more than $420 million in liabilities) for the Milwaukee's rail operations. CMC and the Trustee declared they were satisfied. The ICC considered this revised bid, reopened the former decision (which had suspended judgment on the CNW's proposal) and formally approved CNW's bid. I.C.C.2d (Jan. 8, 1985). It concluded that CNW could realize operational savings of $123 million without abandoning any lines. But by a vote of 4-3 the ICC again favored the acquisition by the Soo. The majority (Chairman Taylor and Commissioners Simmons, Lamboley, and Strenio) concluded that the Soo's bid, though $210 million less than the CNW's, remained fair and constitutionally adequate because it exceeded the net liquidation value of the Milwaukee's rail properties and the average price-earnings multiple of other railroads. The majority was divided, with Chairman Taylor and Commissioner Simmons voting to disapprove the CNW's bid, largely on the ground that acquisition by the Soo would create new competition while acquisition by CNW would not and, without the use of conditions and trackage rights, would reduce competition. Commissioner Strenio, on the other hand, thought the matter "extremely close" and explained that he favored the acquisition by Soo because it "calls for more head-to-head competition between rail carriers". Commissioner Gradison favored the CNW's proposal because of its higher price, raising doubts that the Soo's could be called "fair" to CMC. Vice Chairman Andre and Commissioner Sterrett, although favoring CNW's bid, did not explain their positions.

The reorganization court spoke next, approving the Soo's bid despite the request by the Trustee and CMC that it sell to the CNW. The judge did not write an opinion explaining why. His oral remarks state that he was concerned that CNW planned to file with the ICC an application to abandon as much as 1,100 miles of track if they should prove unprofitable. (CNW had not asked for permission to abandon any particular track, and any concrete proposals would have triggered their own proceedings.) The district court objected to the potential abandonment on several grounds.

Now, that is the matter with abandonment? Well, for one thing it costs jobs. People are going to be out of work that were working on the abandoned transportation system or routes. Another consideration that hasn't been, really, considered very much but was mentioned by one of the Commissioners . . . is the matter of national security.

I must say that I think that national security is a very important consideration for keeping an extensive and more viable system of transportation . . . .

A few hundred million here and a few hundred million there, and we may be talking real money. (Apologies to Everett Dirksen.) But the Department of Defense had not expressed the view that abandonment of track is contrary to interests of national security, and Congress recently make it easier to abandon unprofitable track. See Hayfield Northern R.R. v. Chicago & North Western Transportation Co., 467 U.S. 622, 628-31, 81 L. Ed. 2d 527, 104 S. Ct. 2610 (1984) (describing the evolution of statutes concerning abandonment); cf. Chicago & North Western Transportation Co. v. Kalo Brick & Tile Co., 450 U.S. 311, 319-23, 67 L. Ed. 2d 258, 101 S. Ct. 1124 (1981).

The court gave two other reasons for preferring Soo's bid. One is that the trackage rights that the ICC had recommended to counteract competitive problems in acquisition by the CNW would require administrative and judicial supervision; the court thought that the less supervision the better. The other is that the Soo's parent corporation is the Canadian Pacific Railway. The court stated:

Let's face it. The United States needs foreign trade and needs friends. We are no longer an unsinkable battleship, as they called the British Isles in World War II. If there is going to be another World War, the United States and our transportation system and our cities are going to be targets for the enemy to hit. If we have friends in Canada, we have access to Canada, we have one more way of defending ourselves. But aside from that because I'm not an alarmist about international affairs, it certainly does promote international trade and we certainly are in need of that.

Having established its foreign policy, the court considered whether the Soo's bid was constitutionally adequate. The court relied on what it characterized as the ICC's finding that each bid was "well above the fair market value" of the railroad properties of the Milwaukee. This created a problem, because the CNW had made the higher bid, and actual bids usually establish the "fair market value" of the property; the ICC initial decision had relied on the absence of a bid higher than the Soo's to show that CMC's valuation was unrealistic. The district judge dismissed the extra $210 million as a "windfall" that was "not the property of the CMC" and "not by any means a controlling factor in which railroads should prevail in this particular contest." Although the ICC had held that an acquisition by the CNW would not violate the antitrust laws, a position that the Antitrust Division, representing the United States in this litigation, does not contest, a position the district court apparently accepted, the judge also offered the view that the $210 million difference reflected only the price at which the CNW could "but out some of its competition".

The court then entered an order directing that the Milwaukee's rail assets be sold to the Soo. Paragraph 4 of this order states that the court has considered all of the objections to the ICC's findings and recommendations and that:

the Commission's findings and decisions should be and are approved by this Court, since the findings and decisions were in accordance with law and were not arbitrary, capricious, an abuse of discretion, contrary to constitutional right, power, privilege or immunity, in excess of statutory jurisdiction, authority or limitations, short of statutory right, or without observance of procedure required by law.

The court apparently meant this paragraph to adopt the ICC's conclusion that the Soo's price was constitutionally sufficient and thus dispose of CMC's argument about the inadequacy of the price, because no other part of the order approving the deals with the subject of price.

B

After several parties asked for (and did not get) a stay from this court, Milwaukee and the Soo closed the sale on February 20, 1985. CNW had withdrawn its bid, and CMC does not want to upset the sale to the Soo. The United States and the ICC say that this makes the case moot. Paragraph 4 of the court's order does not affect anything any more, and a court ought not to offer advisory opinions on what would have been. Paragraph 4 is not without moment, however. CMC believes that this paragraph, the equivalent of a declaratory judgment that the Soo's bid satisfied all constitutional requirements, would block its effort to collect under the Tucker Act in the Claims Court. See United States v. Munsingwear, Inc., 340 U.S. 36, 37-38, 95 L. Ed. 36, 71 S. Ct. 104 (1950) (preclusion applies even if review of the earlier judgment was prevented by mootness). CMC wants an obstacle out of the way.

Because the government took the view that paragraph 4 is meaningless, we asked at oral argument whether it would accept an order under Munsingwear, 340 U.S. at 39-41, vacating paragraph 4 as moot. See also Department of the Treasury v. Galioto, 477 U.S. 556, 106 S. Ct. 2683, 91 L. Ed. 2d 459 (1986). The United States objected, for it apparently wants to use paragraph 4 to obtain issue preclusion (collateral estoppel) in the Tucker Act litigation. The continuing dispute means, however, that the case is not moot. The parties are embroiled in controversy about whether the Soo's price was adequate. If they put the question before the Claims Court, that court would not find the matter moot. Because the underlying dispute, the "case or controversy," determines whether a case is moot, this case is not. Suppose Congress had authorized CMC to proceed in two stages: first, to obtain a declaratory judgment in Illinois that the price was inadequate; second, to ask the Claims Court to order the payment of money if the inadequacy is a "taking". No one would say that an appeal from the judgment that the price is adequate is "moot" because the court in Illinois could not order any additional relief. We have that case. More than $210 million hangs in the balance. The accident that divides the issues in the Tucker Act litigation between the Northern District of Illinois and the Claims Court does not make this issue moot. Paragraph 4 resolved a point of contention in an ongoing dispute. It is no different from a declaratory judgment entered by the district court.

Nonetheless there is a substantial question whether we should review paragraph 4. It is one of comity between courts. The Claims Court has exclusive jurisdiction over Tucker Act cases, as the Northern District of Illinois has exclusive jurisdiction over this, the only case under the Milwaukee Railroad Restructuring Act, 45 U.S.C. §§ 901-22. One issue, whether the Soo's price was adequate, is common to both cases. The district court had to address the question to decide who got the Milwaukee's rail properties and at what price; the Claims Court may need to resolve it (if principles of preclusion do not bar the way) to decide whether to order the United States to compensate CMC for the difference between the Soo's bid and the CNW's. Each court is authorized to decide. But the reason the district court was authorized to do so has disappeared. The sale to the Soo may not be undone. Its price is fixed. The question of comity is whether, now that the district court's objective in answering the question has been realized, further litigation that would affect the takings claim should be in the Claims Court and the Federal Circuit.

It is not clear, however, how we might bring that about. The statute authorizing transfers of appeals, 28 U.S.C. § 1631, is limited to appeals that do not invoke the jurisdiction of the court in which they were filed. An appeal from paragraph 4 is within our jurisdiction and may not be transferred to the Federal Circuit. We have explained why it is inappropriate to vacate paragraph 4 as moot. Still a third possibility is to dismiss CMC's appeal because paragraph 4 is no longer relevant to the disposition of any issue concerning Soo's right to own and operate the rail properties. But under Munsingwear an order that left paragraph 4 standing would preclude any collateral challenge in the Claims Court. See 340 U.S. at 37-38; see also Becher v. Contoure Laboratories, Inc., 279 U.S. 388, 391, 73 L. Ed. 752, 49 S. Ct. 356 (1929) (a decision by a state court precludes litigation of issues that affect a federal case even though the federal court has exclusive jurisdiction of patent issues); Murphy v. Gallagher, 761 F.2d 878, 885-86 (2d Cir. 1985) (same in securities law); Restatement (Second) of Judgments § 28(3), comment d at 279, and at 287-88 (when the first court has afforded a full litigation of an issue, and he parties had the incentive to present their claims fully, the decision binds in litigation before a specialized court of exclusive jurisdiction). Cf. Marrese v. American Academy of Orthopaedic Surgeons, 726 F.2d 1150, 1152-54 (7th Cir. 1984) (en banc) (as a matter of federal law of claim preclusion, a court of exclusive jurisdiction is bound by an earlier judgment of another court on the same claim for relief), reversed, 470 U.S. 373, 105 S. Ct. 1327, 84 L. Ed. 2d 274 (1985) (holding that state law of preclusion applies when the first judgment is rendered by a state court). The Federal Circuit, as successor to the Court of Claims, takes this view of preclusion. E.g., General Dynamics Corp. v. United States, 214 Ct. Cl. 607, 558 F.2d 985, 993-94, 198 U.S.P.Q. (BNA) 215 (Ct. Cl. 1977); Gary Aircraft Corp., 226 Ct. Cl. 568, 573 (1981) (dictum); cf. McDonnell Douglas Corp. v. United States, 754 F.2d 365, 368 (Fed. Cir. 1985).

Still another possibility is to vacate paragraph 4 as a matter of comity between courts, leaving all issues to the Claims Court. There is some support for this approach in cases involving state-federal relations. E.g., Colorado River Water Conservation District v. United States, 424 U.S. 800, 47 L. Ed. 2d 483, 96 S. Ct. 1236 (1976) (federal court should abstain when a state court has broad jurisdiction over water rights issues and should consider all claims to water in a single case); Samuels v. Mackell, 401 U.S. 66, 27 L. Ed. 2d 688, 91 S. Ct. 764 (1971) (federal court should not issue a declaratory judgment that will conclude central issues in ongoing state criminal prosecution). See also David L. Shapiro, Jurisdiction and Discretion, 60 N.Y.U.L. Rev. 543 (1985) (discussing the extent to which courts have discretion not to resolve cases within their jurisdiction). But these abstention cases all involved federal litigation that would interfere with ongoing state litigation; the Supreme Court has never suggested that a federal court ought to vacate an existing judgment in order to permit relitigation of a settled claim elsewhere. It has held, instead, that a federal court may issue a declaratory judgment whose principal if not sole purpose is to preclude later state litigation. See Steffel v. Thompson, 415 U.S. 452, 39 L. Ed. 2d 505, 94 S. Ct. 1209 (1974). (The case did not decide, however, whether state courts were bound to respect the federal judgment, and the Justices took divergent views in separate opinions.) Most recently the Court held it appropriate to issue a declaratory judgment designed to preempt issues of law that will come before what would otherwise be a tribunal of exclusive jurisdiction. See United Auto Workers v. Brock, 477 U.S. 274, 106 S. Ct. 2523, 2529-31, 91 L. Ed. 2d 228 (1986). Unless the second tribunal has immunity from such interference, as in Green v. Mansour, 474 U.S. 64, 106 S. Ct. 423, 88 L. Ed. 2d 371 (1986), it is appropriate for the first court properly seized of jurisdiction to decide the complete question.

Although Steffel and UAW v. Brock show that one court may issue declaratory relief that binds a second tribunal of exclusive jurisdiction, they do not hold that it must. Each court must decide whether the potential interference with the business of another is prudent. Kerotest Manufacturing Co. v. C-O-Two Fire Equipment Co., 342 U.S. 180, 96 L. Ed. 200, 72 S. Ct. 219 (1952); Brillhart v. Excess Insurance Co., 316 U.S. 491, 86 L. Ed. 1620, 62 S. Ct. 1173 (1942). It is prudent here. The Claims Court does not possess unique expertise in valuing property or resolving takings claims. The ICC also values railroads (as it did here), and district courts regularly value property for takings purposes in condemnation suits by the government under 28 U.S.C. § 1358 and 40 U.S.C. §§ 257-258f. The exclusivity of the Claims Court is designed to put in one forum all suits seeking ...


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