Mr. SAYRE. That is correct, Mr. Edwards. Mr. EDWARDS. And you would approve of the same provision in the bankruptcy laws-you don't want to give the trustees and the judge more power under bankruptcy to protect the public than they have on a normal day-to-day basis? Mr. SAYRE. Yes, sir, we do. We want to give the court and the trustees greater latitude, as a matter of fact, to bypass the Interstate Commerce Commission entirely on that matter of abandonment of unprofitable lines. Mr. EDWARDS. Then aren't you liable to have railroads that are just hauling freight, or can you trust the trustees and the judge to keep the public interest appropriately in mind? Mr. SAYRE. The prime concern, Mr. Chairman, is the viability of the railroad, and the maintenance of essential services by the railroad. My preference would be to place my confidence with the court and with the trustees and this is based on the track record of the Interstate Commerce Commission on the matter of abandonments. Mr. BUTLER. In this area, though, even assuming that the ICC came up with the wise result, it is the time factor also that concerns you, does it not, the simple involvement of the ICC? And anticipating or waiting for their decision is also part of the problem, as I understand it; is that a fair statement? Mr. SAYRE. Yes, sir. Mr. BUTLER. Is it your view that this proposed section alters the criteria by which abandonment is to be determined? It simply shifts the forum which ultimately must make the decision; is that a fair statement? Or do you feel that somehow the bankruptcy law changes the index by which we determine whether a line shall be abandoned or not? Mr. SAYRE. I think we are changing that, Mr. Butler. Mr. BUTLER. And that is because the overall public interest in maintaining the railroad is greater when it is in bankruptcy, on the threshold of liquidation, I guess, for the total abandonment of the railroad itself as opposed to the individual line, is that it? Mr. SAYRE. I think the main difference would be, in the context of the abandonment, the trustees and the courts would be primarily interested in the viability of the railroad and its continuance in service so that it could eventually file an income based reorganization plan. The interest of the Interstate Commerce Commission is with the public convenience and necessity. The interest of the Interstate Commerce Commission will frequently take the attitude that you should run a spur line into a certain community, even though nobody ships traffic on it, because those people are entitled to that service, and must put a couple of trains a day into a small town at your loss, because it is convenient to the public. It might encourage some business to locate in a certain area if you have railroad service there. Without railroad service that possibility is gone. So I think it is a difference in viewpoint, a difference in basic philosophy Mr. BUTLER. So you think the prime interest, in view of this context, is adequately protected by allowing the ICC advisory input into the court? Mr. SAYRE. I am not sure I understand the question. On the new Bankruptcy Act? Mr. BUTLER. The proposed act. Mr. SAYRE. On the question of the Bankruptcy Act, the question of whether the ICC input to the court is sufficient to protect the public interest? Yes; I think so. Mr. BUTLER. Thank you. I have no further questions. Mr. EDWARDS. Thank you, Mr. Butler. We are going to be debating that particular question that the gentleman from Virginia brought up in some depth. You gentlemen generally represent the freight carriers? Mr. TIERNEY. That is correct. If I could add just a little bit on that abandonment, it seems to me that the Penn Central bankruptcy is a good illustration of what happens when the bankruptcy court is limited in its authority over abandonment. First of all, Mr. Chairman, we are talking essentially about freight service. I think generally speaking passenger service is now pretty much in the public domain. But we are talking about freight service operated by private enterprise corporations. The trustees in bankruptcy proposed changes in several areas, to permit reorganization on an income basis, but were unable to effectuate these changes because of constraints in the law. Absent relief, reorganization under section 77 was not possible. One of the important areas was abandonment. And there were several others including labor agreements. But as far as the abandonment was concerned, through enactment of the Railroad Reorganization Act we accomplished what in effect the trustees were trying to do under the bankruptcy laws. By virtue of the Reorganization Act, there was abandonment of 5.000 miles of line. In short it was not until we were confronted with the Northeast railroad crises that action was taken. If we can do this beforehand the public interest is better protected in our judgment. Mr. BUTLER. Of course I have the impression from you gentlemen that ICC is a little bit behind at this time in developing an appropriate rate philosophy with reference to abandonment; is that right? Mr. SAYRE. That is the impression I tried to leave, Mr. Butler, indeed I did. Mr. BUTLER. Well, it takes a sledge hammer, but I get the picture. Mr. TIERNEY. Recently the ICC proposed a formula designed to facilitate abandonments, but that formula may have been virtually nullified by provisions of the Rail Revitalization Act. Mr. EDWARDS. Are there any railroads that would not like to get out of the passenger business? Mr. TIERNEY. No, sir. Mr. EDWARDS. They all would like to get out? Mr. TIERNEY. Yes. And they are all out through Amtrak with the exception of several railroads, I believe, one of which is the Southern Railway. And apparently they would prefer to stay in it as a private operator rather than be part of Amtrak. And I am not sure what the circumstances were that dictated that decision. Mr. EDWARDS. I am not very neutral, having taken the Bullet Train from Kyoto to Tokyo, 150 miles-an-hour in air-conditioned comfort. I am very sorry that we don't have something like that in the United States. But that does not have too much to do with the subject this morning, although it does have something to do with the fact that the railroads are daily getting more and more out of the passenger business. And under the Bankruptcy Act, as suggested both by the Judges and by the Commission bill, a railroad in financial difficulty is going to find it easier to get out of the passenger business than it would under the present bankruptcy laws, is that not correct? Mr. TIERNEY. I would think so. Our position on that is generally either that, or subsidize it, because passenger service has been a financial burden on the railroads. If you want to keep it a private enterprise operation, then that burden should be eliminated. Mr. EDWARDS. Mr. Tierney, with respect to repossession, why should rolling stock be treated differently than other railroad security or than security in the business bankruptcy cases? Mr. TIERNEY. Our basic reason for that, Mr. Chairman, is that this really is essentially the only financing available to the railroads now. Institutional investment companies over the past several decades have in most instances confined themselves to that type of financing. They have not put their money in other areas. From the standpoint of the availability of private financing for the railroads, we would urge that the treatment of leases and conditional purchases be retained, and remain the same. Mr. BUTLER. I need a little help in this area. In the first place, how do you protect your title in rolling stock? Is there a recording device which is maintained by the ICC? Or how specifically do you do that? Mr. TIERNEY. Mr. Simpson. Mr. SIMPSON. Yes; that is true. Some years ago the act was amended to provide for central recording. Before that, it was necessary to record liens in all the various States where the railroad passed to be sure that you were protected. And the central recording was provided. Mr. BUTLER. So that is all a matter of Federal regulation with respect to protecting whatever your rights are, lease rights, or security interest, or whatever you want to call it in rolling stock; it is by Federal legislation that it is protected? Mr. SIMPSON. Yes, sir. Mr. BUTLER. What are the limitations on your repossession now of the vendor's equipment. Mr. SIMPSON. If the conditional sales agreement or the lease does not contain a specific express provision permitting the owner of the equipment-that is, the conditional vendor or the lessor-to retake it, in the event of bankruptcy or insolvency, then the conditional vendor or lessor cannot retake it. That is really the only restriction. Mr. BUTLER. In other words, any right you reserve in your agreement you can assert? Mr. SIMPSON. That is right. Mr. BUTLER. Now, in the event of bankruptcy, do you lose any of those rights under section 77? Mr. SIMPSON. No, sir. Section 77 specifically provides that the conditional vendor or lessor may retake the equipment in the event of bankruptcy if the related agreement so provides. Mr. BUTLER. And it is that right that you want to preserve in the proposed changes in the bankruptcy law? Mr. SIMPSON. Yes, sir. Mr. BUTLER. In the reorganization cases-and we have what, eight of them over the last few years-have there been efforts to repossess the rolling stock in those instances? Mr. SIMPSON. Yes, sir. In the case of the Erie there was action through repossession. Mr. BUTLER. And how does a railroad make money if you have taken their rolling stock away from them? Mr. SIMPSON. If it is essential rolling stock, that puts them in a very precarious position. That is one reason equipment financing has been considered very well secured, because if you can take away the equipment and stop the railroad, they are in a hopeless situation. So that the trustees will ordinarily affirm those agreements, making the claims have high priority Mr. BUTLER. The claims become administrative expenses? Mr. SIMPSON. Yes, sir. Mr. BUTLER. And you want to be sure that you have that leverage in the future? Mr. SIMPSON. Yes, sir. Mr. BUTLER. Is there an option in the trustee? Suppose the trustee wants to affirm and the conditional vendor does not want to even go that far with him because he has a good prospect with the solvent railroads for disposing of this equipment if he repossesses it; what are the rights of the trustee? Mr. SIMPSON. Literally, the conditional vendor could retake the equipment. I don't think they would. They haven't done it in Penn Central or any of the other railroad cases. Mr. BUTLER. But the Penn Central is pretty big; there were not very many places to dispose of that much equipment. Mr. SIMPSON. Yes. Mr. BUTLER. But if a little railroad in southwest Virginia goes bankrupt, the vendors might be able to dispose of their rolling stock. So I wonder if this is not something that a trustee wants to have more control over than you want to give him. I am not comforted much by what you said here. Mr. SIMPSON. We don't think it is really a practical problem, because the last thing the creditor wants to do is to have to gather the equipment-the equipment in the case of a bankrupt railroad Mr. BUTLER. He probably cannot find it? Mr. SIMPSON. That is right. At least one insurance company had actual experience several years ago. They had financed a number of, I think it was, freight cars, and a number of years went by, and then they tried to locate the equipment, and it was virtually impossible in a long period, the record had been lost. Now, in the case of almost any railroad, a lot of its equipment will actually be on the lines of other railroads at a given time. And to undertake the job of getting that equipment back in a place where you can take it over and then try to sell it is better than not having that right. Mr. BUTLER. Does not your vendor's agreement provide that it is a responsibility of the borrower or lessee to gather the equipment together at your request? Mr. SIMPSON. That is right. The conditional sales agreement and the leases specifically provide for that. Mr. BUTLER. But it is hard to execute? Mr. SIMPSON. Yes. But in the case of a bankrupt railroad, you ask the trustee, please do this, and you wait for it to happen. And if it does 59-591-76-pt. 4- -39 not happen, then you have got the question of what can you do to try to get it speeded up. Mr. BUTLER. So basically you do not really see any practical problem to keeping a railroad going even if you reserve the rights that you presently have! Mr. SIMPSON. That is right. Mr. BUTLER. Thank you. Mr. KLEE. Thank you, Mr. Chairman. Gentlemen, do you all agree that the bankruptcy court should have the power to deal with railroad mergers, or should the ICC retain that function in a bankruptcy case? Mr. SAYRE. Is the question directed to two railroads in reorganization, or one solvent road and one bankrupt road! Mr. KLEE. Consider both cases. Mr. SAYRE. In the case of a solvent railroad and a bankrupt railroad, I believe that the court should have the authority to approve a merger, assuming that it is in the best interest of creditors of the bankrupt railroad, similar to a situation where there is an ordinary business bankruptcy. In the case of two insolvent railroads-and I am thinking of the railroads that sold to Penn Central-I would think that the Interstate Commerce Commission should have considerable input, but not control. I think we ought to have the same situation which appeared to be very viable in the case of ConRail where a master system plan was made by railroad planners without the approval of the Interstate Commerce Commission. The net result was that that is the system that we have now, and certain lines have been abandoned and will be abandoned. It would appear that it is going to be an efficient railroad system. I see no reason why, with that pattern, reorganization courts, especially with the consolidation that we are talking about of various cases under one trustee, could not be accomplished in the courts. Mr. KLEE. It is my recollection that section 77(a) requires a railroad corporation to be insolvent before it may file a voluntary petition. The requirement of insolvency as a condition of eligibility to file a voluntary petition is eliminated under both bills. Do you agree with that change? Mr. SAYRE. Insolvency in the sense that the liabilities exceeds the assets as a condition precedent-yes; I would agree with that change. Insolvency in the sense that they are unable to meet their obligations as they occur, that has not been changed. It is the ground under the new bill. the proposed bill, and I think that should stay. Mr. KLEE. The new bills incorporate section 7-304 of H.R. 31 and section 7-302 of H.R. 32 which permit creditors to file a plan. Section 77(d) of the current law does not permit creditors holding less than 10 percent of the amount of the claims to file a plan. Do you think that creditors ought to be able to file a plan in a railroad organization regardless of the percentage of claims they hold? Mr. SAYRE. With the safeguard that the judge in the first instance has the right to determine whether or not the plan is worthy of consideration. We have that provision in chapter X. It has seemed to |