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In re Chicago

decided: August 17, 1987.

IN THE MATTER OF CHICAGO, MILWAUKEE, ST. PAUL AND PACIFIC RAILROAD COMPANY, DEBTOR


Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 77 B 8999 - Prentice H. Marshall, Judge.

Author: Ripple

Before WOOD, JR., and RIPPLE, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.

RIPPLE, Circuit Judge.

In this appeal, the Railway Labor Executives' Association (RLEA) challenges Order Nos. 832*fn1 and 866*fn2 entered by the district court in the ongoing bankruptcy proceeding of the Chicago, Milwaukee, St. Paul & Pacific Railroad Company (debtor or Milwaukee Road). Order No. 832 confirmed the final plan of reorganization submitted by the trustee of the debtor. Order No. 866 set a consummation date for the discharge of the debtor and the trustee and for the dissolution of the estate. In essence, RLEA claims that Order No. 832 should be set aside because the plan of reorganization approved in that order filed to provide for claims of RLEA members made pursuant to a wage deferral agreement entered into by RLEA and the debtor. RLEA further argues that, because the order affirming the plan was improper, the order setting a date for the consummation of the plan was improper. We find these claims to have no merit. Accordingly, we affirm the orders of the district court.

I

A detailed factual rendition of this long, complicated proceeding would unduly burden the length of this opinion. Therefore, we shall limit the following presentation to those events necessary to the issues before us in this appeal.

A. Background

On December 19, 1977, the Milwaukee Road filed a petition for reorganization pursuant to section 77 of the Bankruptcy Act, 11 U.S.C. § 205.*fn3 Although the railroad was suffering substantial financial losses at the time, the reorganization court initially ordered it to continue its operations. In November 1979, with permission of the court, the trustee suspended operations over more than half of the Milwaukee Road system. However, during the same month, Congress enacted the Milwaukee Railroad Restructuring Act (MRRA or Restructuring Act) which provided that the entire railroad should be operated until the Interstate Commerce Commission (ICC) determined whether the Milwaukee road could be reorganized. See 45 U.S.C. §§ 901-922.

After the ICC determined, in early 1980, that the existing plan of reorganization was not feasible, the trustee obtained orders allowing the abandonment of approximately two-thirds of the Milwaukee Road's system.

B. The Wage Deferral Agreement

In August 1980, the trustee entered into an agreement with most of RLEA's member organizations (these organizations represented Milwaukee Road employees) whereby 10% of those employees' wages were deferred between August 1, 1980 and January 1, 1981, and 7% of their wages were deferred for the year 1981. Appellant's App. F at 1. The agreement, the pertinent text of which is set forth in the footnote,*fn4 provided that, if the railroad were reorganized, the employees would receive preferred or preference stock in the reorganized successor to the Milwaukee Road. The agreement further provided that each employee would receive an amount of stock equal 1.3 times the amount of wages deferred for the years 1980 and 1981, as well as 1.2 times the amount deferred in 1982, and 1.1 times the amount deferred in 1983 (should the agreement be extended to those years). Id. at 3, Para 6(a). Finally, the agreement also provided that, if the railroad were not reorganized, but instead its rail assets were liquidated, the employees would have claims in the amount of their deferred compensation and that those claims would have the same status as costs of administration. Id. at 3-4, Para. 6(b). The reorganization court approved the wage deferral agreement in Order No. 397. Matter of Chicago, Milwaukee, St. Paul & Pac. R.R., No. 77 B 8999 (N.D. Ill. Sept. 8, 1980); Appellant's App. G.

C. The Trustee's Plan of Reorganization and the Various Offers to Purchase the "Core Assets"

The trustee and other third parties interested in purchasing the Debtor's "core assets"*fn5 then submitted plans of reorganization to the reorganization court.

1. The GTC's Plan

In March 1983, the trustee filed an amended plan of reorganization. This new plan contemplated reorganizing the core assets of the Milwaukee Road separately from its other assets. In the March 1983 plan, the trustee proposed that, once this reorganization took place, the Grand Trunk Corporation (GTC) would acquire the stock of the Milwaukee Road. This plan proposed to satisfy the wage deferral claims through the issuance of preferred stock.

2. The CNW and Soo Plans

Shortly after the GTC plan was filed with the ICC, two other railroads, the Chicago & Northwestern Transportation Company (CNW) and the Soo Line Railroad Company (Soo), filed applications to purchase the Milwaukee Road's operating rail assets. Both the CNW plan and the Soo plan differed from the GTC plan. Rather than providing for the acquisition of the stock of the reorganized Milwaukee Road by the purchaser, these plans proposed, through asset purchase agreements (APAs), that the purchase would create a subsidiary that would purchase the core assets of the Milwaukee Road. As originally submitted, these plans proposed to satisfy the wage deferral claims through the issuance of preferred stock, just as the GTC plan had. Later, however, both the CNW and the Soo submitted amendment plans in which they proposed to satisfy the wage deferral claims with cash payments is possible (with payment being at face value of the wage deferral claims). If cash repayments were not possible, these amended plans provided that the claims would be satisfied through the issuance of preferred stock.*fn6

D. Initial ICC Scrutiny of the Reorganization Plans

The reorganization court transmitted the various reorganization plans to the ICC as required by the MRRA. In its first order, the ICC approved the Soo's plan, including the proposal to satisfy the Wage deferral Agreement claims in cash rather than preferred stock. The ICC therefore certified the Soo plan to the reorganization court. At this time, the ICC took no action on the CNW's plan and rejected the GTC's plan.

After the ICC approved the plan or reorganization submitted by the Soo, the CNW raised its bid by approximately $210 million. The trustee then sought permission to seek ICC approval of the revised CNW plan. The reorganization court granted this request. it returned both the Soo and the CNW plan to the ICC and asked that the ICC state a preference for either the Soo or the CNW plan.

E. The Application of the Trustee to the Reorganization Court to Settle the Wage Deferral Claims

On November 28, 1984 -- while the Soo and CNW plans were still pending before the ICC -- the trustee sought the permission of the reorganization court to settle the wage deferral claims in accordance with the terms contained in the APAs of both the Soo and the CNW. The trustee told the court that this action was taken to permit the employees to enjoy favorable tax treatment if the funds were received in 1984. He argued that the proposals before the ICC (one of which would presumably be effectuated) constituted a liquidation, not a reorganization, of the Milwaukee Road's assets. Therefore, he maintained cash payments, rather than stock, were appropriate. However, because the sale of the core assets was not yet final, the trustee ...


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