In the Matter of the Central Railroad Company of New Jersey, Debtor. Appeal of State of New Jersey

485 F.2d 208

• Court: Court of Appeals for the Third Circuit
• Decided: January 7, 1974
• Docket: 73-1006 and 73-1027
• Status: Published

Opinions

ADAMS, Circuit Judge:

May a district judge presiding over a railroad reorganization, pursuant to Section 77 of the Bankruptcy Act,¹ permit the Trustees of the railroad to discontinue a loss-producing service or must he withhold his authorization until the Trustees have applied to federal or state regulatory agencies for permission to terminate the service?

The State of New Jersey answers that permitting the discontinuance before administrative review would thwart any attempt to create a viable rail system essential to the economic life of the region. The Trustees of the Central R. Co. of New Jersey, by way of rejoinder, assert that denying the request for discontinuance could result in an unconstitutional taking of property. Resolution of this appeal requires this Court to address these contentions.

I.

The Central Railroad of New Jersey (Central) is one of the many railroads

2 in the Northeast that is presently undergoing reorganization pursuant to section 77 of the Bankruptcy Act. The Central’s lines, prior to entry into reorganization, extended from the Newark-Jersey City area in Northeastern New Jersey west to the northeast corner of Pennsylvania (the “hard coal region”) and south to Southern New Jersey, ending near the Delaware Bay.

3

The majority of the customers served by the Central are located in the Northern New Jersey metropolitan area. In that region, the Central provides shipping services for industry and, more significantly for this appeal, carries approximately 25,000-30,000 riders a day.⁴ The vast majority of these riders are commuters who use the train to travel from western and southern suburbs into Newark or Jersey City. Many of these commuters continue to New York, using other public transportation facilities.

The State of New Jersey has for a number of years provided subsidies to the several railroads that transport commuters in New Jersey. Since the entry of the Central into reorganization in March, 1967, that railroad has received annual subsidies from the state ranging from a high of $5,100,000 ih 1972 to a low of $4,400,000 in 1970. The granting of the subsidy has been made pursuant to contracts entered into between the railroad and the state acting through its Commuter Operating Agency. Many of the terms of the contracts are prescribed by statute. In July of 1972, the railroad and the state contracted for the Central to continue to furnish passenger service through June 30, 1973. The railroad was obligated to run trains according to an agreed upon schedule and compensation was to be paid by the state on the basis of the railroad’s “avoidable loss” for the preceding year.⁵ Article Seventeenth of the contract provided:

“Each party reserves the right to cancel this agreement at the end of any calendar month upon 30 day’s notice to the other party.” ⁶

Alleging that the subsidy paid by the state was inadequate to compensate the railroad, the Trustees petitioned the reorganization court for permission to exercise their right of cancellation under the contract and to terminate all their passenger services in New Jersey.

The district court, in an order dated December 20, 1972,⁷ based on an oral opinion delivered earlier,⁸ granted the Trustees’ petition, and ordered termination of all passenger service as of January 21, 1973. The district court’s order was appealed to this Court and a panel of the Court relying on a brief per curiam opinion permitting suspension of the Central’s Pennsylvania operations,⁹ affirmed the decision of the district court.

The State of New Jersey and the Commonwealth of Pennsylvania¹⁰ filed petitions for rehearing before the Court En Banc. The petitions were granted and argument before the Court En Banc was had on May 23, 1973.10a The termination of passenger service has been stayed pending resolution of this appeal.¹¹ Such resolution is now incumbent upon us.

II.

The Trustees first contend that we must affirm the district court because the Court is bound by the doctrines of “law of the case” and stare decisis to follow its earlier decision permitting the suspension of service in Pennsylvania.¹² This contention is without merit, for it has long been the rule in this Circuit that decisions made in similar cases¹³ by panels of this Court are binding on other panels but are not controlling on the Court En Banc. Indeed, it is only through the Court En Banc that precedents established by earlier panel decisions may be reexamined.¹⁴

In addition, the Pennsylvania case is distinguishable from this appeal. The former decision authorized suspension of certain passenger services pending ICC action on applications for abandonment of such service, which action was arguably unduly delayed. In the present case, however, the Trustees have not filed applications with either the ICC or state regulatory authorities.

III.

A review of the earlier decision must begin with an examination of the railroad reorganization statute and proceed to an explication of the relationship between administrative agencies and a district court supervising a railroad reorganization under that statute.

The decision to permit termination was made by the district court in December, 1972. At that time, the Trustees had not sought approval for the termination of passenger service in any forum other than the district court. No action had been commenced before the New Jersey regulatory agencies; no abandonment proceedings had been initiated before the Interstate Commerce Commission.¹⁵

A termination of passenger service is an action that may not fall squarely within the ambit of statutes which control abandonments of railroad lines or portions thereof.¹⁶ However, whether the termination is or is not denominated an abandonment, prior administrative approval appears mandated before a district court overseeing a reorganization may permit the discontinuance of an important component of a region’s rail service.16a

Section 77(o) provides that the district court may permit abandonment of “lines or portions of lines of railroad.” It states in pertinent part:

“(o) The trustee or trustees, from time to time, shall determine what lines or portions of lines of railroad and what other property of the debtor, if any, should be abandoned or sold during the pendency of the proceedings in the interest of the debtor’s estate and of ultimate reorganization but without unduly or adversely affecting the public interest, and shall present to the judge petitions, in which other parties in interest may join, for authority to abandon or to sell any such property; and upon order of the judge made after a hearing pursuant to such reasonable notice by publication or otherwise as the judge may direct to parties in interest, authorizing any such abandonment or sale, but only with the approval and authorization of the Commission when required by chapter 1 of Title 49, as amended February 28, 1920, or as it may be hereafter amended. . ”¹⁷

As section 77(o) makes clear, if the railroad is subject to the jurisdiction of the ICC, no abandonment may take place without the approval of that agency.¹⁸

If the termination of passenger service is not denominated an abandonment, or if the Central’s service is not subject to the purview of the ICC,¹⁹ the requirement of ICC approval mandated by section 77(o) would appear not to apply. Nonetheless, the district court may not be free to permit termination without prior administrative approval.

New Jersey has developed its own administrative agencies that regulate the conduct of certain railroads within the state. Approval of the appropriate agency is required under New Jersey law before any service may be discontinued.²⁰ If the approval of the state agency is withheld or unduly delayed, under a special provision recourse may be had to the ICC.²¹

The Supreme Court has explicitly stated that compliance with a state’s regulatory program is required of railroads undergoing reorganization.

Palmer v. Massachusetts ²² involved an attempt by the Trustees of the New Haven Railroad to terminate passenger service to eighty-eight stations in the Boston region. To effectuate such a termination, the Trustees, as required by state law, began proceedings before the Massachusetts Department of Public Utilities. While the state hearings were being conducted, the Trustees applied to the district judge supervising the reorganization for permission to carry out the same terminations. The district court, “ruled that § 77 gave him the responsibility of disposing of the petition on its merits and, having taken evidence, gave the very relief for which the Trustees had applied to the Department and which was still in process of orderly consideration.”²³ The U.S. Court of Appeals for the Second Circuit reversed,²⁴ and the Supreme Court affirmed that reversal.

In holding that the district court supervising the reorganization did not have the power to permit terminations in derogation of state regulatory procedures,²⁵ the Supreme Court, speaking through Justice Frankfurter, strongly emphasized the importance of preserving state control in the first instance :

“In view of the judicial history of railroad receiverships and the extent to which § 77 made judicial action dependent on approval by the Interstate Commerce Commission, it would violate the traditional respect of Congress for local interests and for the administrative process to imply power in a single judge to disregard state law over local activities of a carrier the governance of which Congress has withheld even from the Interstate Commerce Commission, except as part of a complete plan of reorganization for an insolvent road.” ²⁶

It may be argued that the crisis now confronting the eastern railroads and the great changes that have come about in the economy generally, and to the railroad industry in particular, require a: different result from that reached in Palmer. However, the blunt fact is that Palmer has not been undercut by subsequent decisions of the Supreme Court, nor has its vitality been called into question.

One aspect of Palmer v. Massachusetts has, in fact, been strongly reiterated in the New Haven Inclusion Cases.²⁷ There, the Supreme Court emphasized the important role of a regulatory agency, the ICC,²⁸ in the administration and resurrection of railroads in reorganization.²⁹

In the present case, the district court approved the termination of the passenger service without having required that the proposal first be submitted to an appropriate regulatory agency. Unless this case is not controlled by section 77(o) or Palmer v. Massachusetts, it would appear that the district court’s action was not proper.

IV.

The Trustees contend that termination must be permitted at this time, without agency consideration. Such termination, they assert, is necessary to stop the financial drain on the railroad, which has risen to such magnitude as to be an unconstitutional taking of property.

Underlying the taking argument is the basic principle that an owner of property retains the right ultimately to withdraw that property from a losing venture.³⁰ Indeed, such a right appears to be a fundament of the taking provision.³¹ Operation of the passenger services, if not more adequately compensated, would, at some point, so substantially reduce the assets remaining in the railroad that the continuation would constitute a taking.

The Trustees might contend that a requirement that they seek relief now from the appropriate agency would result in further delay in termination and that any delay would exacerbate an already critical financial situation. They might further argue that the resort to New Jersey agencies would most likely provide only frustration, and therefore would be an empty formality.

However, the fact remains that the Trustees have not sought relief from the appropriate agency. There having been no application made, there can be no showing that delay³² or frustration³³ would be the inevitable result.

The cases of Brooks-Scanlon Co. v. Railroad Comm.³⁴ and Railroad Comm. of Texas v. Eastern Texas R. Co.³⁵ make clear that a railroad may not be required to remain in business in the face of confiscatory losses. Both of these cases, however, dealt with attempts by each railroad to leave the railroad business entirely. In the present case, the Trustees do not seek to abandon all their railroad operations. Rather they ask to terminate only the passenger service. In contradistinction to the situation now before us, the earlier cases involve attempts by the unprofitable venture to renounce their state-granted franchise completely. Here, the Trustees would have the district court permit them to select those aspects of their state-granted privilege they choose to accept without allowing the state to impose any further burden on the exercise of the privilege.³⁶

Further, these two cases do not decide whether in seeking to terminate a service, the Trustees may, with the approval of the district court, by-pass the state and federal administrative procedures.

In Brooks-Scanlon, the action underlying the case was an order of the Railroad Commission of Louisiana requiring a lumber company to operate its railroad on schedules approved by the Commission. With the Commission having already acted, and having mandated continuation of the confiscatory services, the Supreme Court held that the railroad need not formally petition the Commission for permission to terminate. The Court, through Justice Holmes, stated:

“[I]t seems unlikely that after the Commission has called the plaintiff before it on the question and against its strenuous objection has required it to go on, such an empty form cannot be required.”³⁷

With the position of the Commission being clear, the Supreme Court could then state,

“Whatever may be the forms required by the local law it cannot give the Court or Commission power to do what the Constitution of the United States forbids, which is what the order and the injunction attempt.”³⁸

In Eastern Texas, the railroad was attempting to abandon the intrastate service on the railroad. Interstate service had already been abandoned, after such abandonment had been approved by the ICC.³⁹

The Trustees here, however, have not sought any administrative review whatsoever. Thus, there can be no clear statement that the agencies would require service continued as is, that they would attempt to impose confiscatory requirements, or that they would not grant suitable relief.

Palmer v. Massachusetts clearly states that administrative agencies may not be disregarded.

“Continuance of state control over these local passenger services will, it is urged, impair the bankruptcy court’s power to formulate a reorganization plan for the approval of the Interstate Commerce Commission. Such embarrassments due either to the time required for exhaustion of the orderly state procedure or to the financial losses that may be involved in the continuance of local services until duly terminated by the state, may easily be exaggerated. It is not without significance that after four years no reorganization plan for the New Haven has yet been evolved. Perhaps it is no less true that amenability to state laws will serve as incentive to the formulation of reorganization plans which, on approval by the Commission, do supplant state authority. But, in any event, against possible inconveniences due to observance of state law we must balance the feelings of local communities, the dislocation of their habits and the over-riding of expert state agencies by a single judge. . . .”⁴⁰

Therefore, this Court holds that termination of passenger service cannot be ordered by the district court supervising the reorganization of a railroad under section 77, unless such termination has been approved by the appropriate agency.⁴¹

V.

This Court’s holding does not preclude district courts from permitting ailing railroads to terminate services. Rather, it holds only that the reorganization court require railroads seeking terminations to follow certain procedures. Adherence to such procedures is not an exercise in formalism. Rather, such adherence reflects two important concerns. First, application to the appropriate state agency preserves the balance between federal and state powers in this field. Second, administrative review assures that an agency with substantial expertise, be that agency state or federal, will provide that the appropriate amalgam of public concerns for rail transport and private rights of property is achieved.

Having reached this result, however, the Court must express its disquiet over the plight of the bondholders of this railroad, and the other railroads whose reorganizations are being conducted by courts of this Circuit. In many respects, it is their equity which is being used to sustain these railroads. Such a situation is most unfortunate. The dissenting opinion paints a most graphic and colorful picture of this serious condition. Yet, this Court may provide such bondholders and other creditors relief only within the confines of Section 77, the enactment which encompasses the procedure mandated by the Congress, and the Supreme Court opinions interpreting that statute.

Were this Court not a judicial body but a legislative body, it could fashion perhaps a more equitable system for financing vitally needed yet inherently unprofitable rail services. Indeed, the time is rapidly approaching when both federal and state legislative bodies must squarely meet that responsibility. Such is not our prescribed role, however, as enticing as such assignment might be. Instead, our task is to apply the statute Congress has enacted unless such statute inexorably conflicts with the Constitution. The record in this case does not demonstrate that such conflict has happened here — at least, not as yet.⁴²

Therefore, the judgment of the district court will be reversed and the case remanded for proceedings consistent with this opinion.

APPENDIX

Statements by Trial Court Bearing on Question of “Taking”

. . unless some way is found to fully compensate the debtor for its passenger operations that such operations of necessity must cease. Otherwise we will run into an erosion of assets that will result in an unconstitutional taking of the debtor’s property.” (Emphasis added) 429a

“CNJ asks this Court to terminate the present subsidy contract as of December 31, 1972, and at that time to terminate all passenger services of the debtor as of 11:59 p. m. on that date, unless, prior thereto, suitable arrangements can be made with the State to continue the carriage of passengers,” (Emphasis added) 431a

“Perhaps the parties should pay a little attention to the spirit behind that particular paragraph. Perhaps between now and the time the cancellation becomes effective the parties can get together to the end that perhaps this particular carrier can continue to operate both freight and passenger service in the State of New Jersey.” 433a

“We cannot lose sight of the fact that some progress has been made and that conditions subsequent to March of 1971 have helped rather than hindered the estate, and consequently those who hold security interests in the estate.” 439a

“We have had some changes here, and they are all changes that I think are very beneficial, . and will be of benefit to the estate generally. And I have reference to a few of them that were mentioned here.” 440a

“And I could go on with a few others. But you all heard what they are. But they are all indications, they are all activity, they all indicate that improvement is being made, that the condition of the railroad is not too bad, insofar as the bondholders’ security is concerned.” 442a

1 . 11 U.S.C. § 205.

2 . Other railroads which have begun court-supervised reorganizations include the Penn Central, Lehigh & Hudson River, Reading, Lehigh Valley, Erie Lackawanna, New Hope & Ivyland, New Haven and the Boston & Maine.

3 . The Pennsylvania service of the Central was terminated pursuant to Order No. 445 of the Reorganization Court, issued December 20, 1971. The Order was affirmed by this Court, In Matter of Central R. Co. of New Jersey, 455 F.2d 989 (3d Cir. 1972).

4 . A rider is a passenger on a one-way trip. A commuter who rides the train to work in the morning and from work in the evening would be counted as two riders.

5 . The “avoidable loss” figure is computed by determining whether a particular cost would be avoided if passenger service were discontinued.

Under a “full cost” compensation program, the railroad is reimbursed for all expenses involved in operating the passenger service not just those which are attributable exclusively to that service.

Thus, under the full cost system the railroad is compensated pro rata for management expenses, depreciation and debt service. These items, if not directly related to the provision of passenger service, would be uncompensated under the “avoidable loss” program.

By statute, New Jersey has changed its compensation within the past year from “avoidable loss” to “full cost.”

6 . Appendix at 25a.

7 . Order No. 547, Appendix at 435a.

8 . Appendix at 423a.

9 . In Matter of Central R. Co. of New Jersey, 455 F.2d 989 (3d Cir. 1972). (The panel consisted of Circuit Judges Maris and Aldisert and District Judge Gorbey.)

10 . Pennsylvania’s interest in the termination arises from the existence of four trains a day between Philadelphia and Newark, which are operated jointly by the Beading Railroad and the Central. Pennsylvania’s argument parallels New Jersey’s, and future reference will be to New Jersey only.

. Judge Maris did not sit with the Court En Banc because of a temporary illness. Judge Gorbey did not sit since district judges are not authorized to sit on en banc rehearings in the Court of Appeals.

11 . See N.Y. Times, July 1, 1973, at 25, col. 8.

12 . In Matter of Central R. Co. of New Jersey, 455 F.2d 989 (3d Cir. 1972).

13 . The similarity of this case with the cause involving terminations in Pennsylvania is not sufficiently great to permit the invocation of the doctrine of “preclusion” against New Jersey. Scarano v. Central R. Co. of New Jersey, 203 F.2d 510 (3d Cir. 1953), indicates the greater congruence necessary for the doctrine to be operative.

14 . See e.g., United States ex rel. Reed v. Anderson, 461 F.2d 739 (3d Cir. 1972), overruling, United States v. Zeiler, 427 F.2d 1305 (3d Cir. 1970).

15 . A reorganization plan had been filed by the Trustees with the ICC in August, 1971. But such plan, which is still pending before the ICC, included continued passenger service, not termination of such service. Brief of Appellants at 2.

16 . See e.g., Section 77(o), 11 U.S.C. § 205 (o). Compare Smith v. Hoboken R. Co., 328 U.S. 123, 66 S.Ct. 947, 90 L.Ed. 1123 (1946), with Board of Public Utility Com’rs of New Jersey v. United States, 158 F.Supp. 98 (D.N.J.1958), prob juris noted, 357 U.S. 917 (1958), dismissed as moot, 359 U.S. 982, 79 S.Ct. 939, 3 L.Ed.2d 932 (1958).

. For the purposes of the present appeal, this Court has assumed that the district court would have the power to permit termination of certain rail services if such termination had been approved by the appropriate administrative agency.

17 . 11 U.S.C. § 205 (o).

18 . This Court has recently discussed at some length, the role of subsection (o) in the general scheme of section 77. See In Matter of Penn Central Transportation Co. (Sale of Park Avenue Properties), 484 F.2d 323 (3d Cir. filed June 14, 1973). Whether the import of that case, limiting extensive sales dispositions made pursuant to a reorganization plan, would affect abandonments made with ICC approval but not following a plan of reorganization is a question not involved in the resolution of this case.

19 . It may be contended that since the operations are intrastate, they are not subject to ICC control.

20 . If, as is true here, the termination is of passenger service provided under a contract involving public funds, approval of the Commuter Operating Agency would be necessary. N.J.S.A. 27 :lA-24. Were public funds not involved, application must be made to the Board of Public Utility Commissioners. N.J.S.A. 48:2-13.

21 . 49 U.S.C. § 13a (2).

22 . 308 U.S. 79, 60 S.Ct. 34, 84 L.Ed. 93 (1939).

23 . Palmer v. Massachusetts, 308 U.S. 79, 83, 60 S.Ct. 34, 36, 84 L.Ed. 93 (1939).

24 . Converse v. Massachusetts, 101 F.2d 48 (2d Cir. 1939).

25 . Terminations made pursuant to a plan of reorganization do not need state approval. Section 77(f), 11 U.S.C. 205(f).

26 . 308 U.S. at 88, 60 S.Ct. at 38 (citation omitted).

27 . 399 U.S. 392, 90 S.Ct. 2054, 26 L.Ed.2d 691 (1970).

28 . The ICC can play a role in termination proceedings committed in the first instance to state regulatory agencies. See 49 U.S.C. § 13a (2). That section was added to the statute in 1958, to permit ICC action in the event of adverse state agency actions. Thus, there was no role for the ICC at the time of Palmer v. Massachusetts.

29 . New Haven Inclusion Cases, 399 U.S. 392, 431, 90 S.Ct. 2054, 26 L.Ed.2d 691 (1970).

30 . See Note, Takings and the Public Interest in Railroad Reorganization, 82 Yale L.J. 1004 (1973). The Note describes the practice followed in the New Haven Railroad’s reorganization wherein the continued operation of the railroad reduced the value of the physical plant of the road and thus eroded the creditors’ assets. The Note states that this practice was approved by the Supreme Court and argues that by so approving, the Court has substantially altered the meaning of the taking clause.

31 . See Brooks-Scanlon Co. v. Railroad Comm., 251 U.S. 396, 40 S.Ct. 183, 64 L.Ed. 323 (1920); Railroad Comm. of Texas v. Eastern Texas R. Co., 264 U.S. 79, 44 S.Ct. 247, 68 L.Ed. 569 (1924).

32 . It may be noted that the ICC has adopted new procedures expediting the disposition of applications for abandonment of lines. See Commonwealth of Pennsylvania v. United States, 361 F.Supp. 208 (M.D.Pa. filed June 4, 1973).

33 . Were the Trustees unsuccessful before the state agency, recourse could be had to the ICC pursuant to 49 U.S.C. § 13a (2).

34 . 251 U.S. 396, 40 S.Ct. 183, 64 L.Ed. 323 (1920).

35 . 264 U.S. 79, 44 S.Ct. 247, 68 L.Ed. 569 (1924) .

36 . See Fort Smith Traction Co. v. Bourland, 267 U.S. 330, 45 S.Ct. 249, 69 L.Ed. 631 (1925). But see Norfolk & Western Ry. Co. v. West Virginia, 236 U.S. 605, 35 S.Ct. 437, 59 L.Ed. 745 (1915). Under section 77(g), 11 U.S.C. § 205(g), the Trustees could ask that the proceedings be dismissed, thus, perhaps, resulting in the railroad’s ultimate withdrawal from the railroad business.

37 . 251 U.S. at 400, 40 S.Ct. at 184.

38 . Id.

39 . 264 U.S. at 83, 44 S.Ct. 247.

40 . 308 U.S. at 89, 60 S.Ct. at 39.

41 . This Court need not decide, at this time, ■whether such termination order should be granted if there appeared to the district court to be undue delay by the administrative agency.

42 . There is set forth in the attached Appendix a series of statements by the distinguished and able trial judge who has supervised the reorganization, which illustrate that the point of a taking, .in the sense of due process, has not yet been established in this proceeding so as to justify a deviation from the mandate of Section 77. The statements are contained in the district court’s opinion on the Trustees’ motion to cancel the passenger contract and on the petition of Manufacturers Hanover Trust Company to terminate all operations of the Central.