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railroad in reorganization are likely candidates for abandonments. Section 802 of that Act adds a new section la to the Interstate Commerce Act, which requires each railroad to submit, and keep updated, a diagram of its entire transportation system including a detailed description of each line which is "potentially subject to abandonment" and an identification of any line as to which such carrier plans to submit an application for a certificate of abandonment or discontinuance. This information should be very helpful to the Commission in determining whether to grant abandonments and also should be of assistance in the development of a reorganization plan in that it gives the Commission a good perspective on the relative viability of the various parts of a railroad in reorganization.

Another important point to bear in mind about section 802 is that, in conjunction with section 303 of Public Law 94-210, it imposes time deadlines on all phases of the abandonment process before the Commission. These deadlines ensure that the Commission will process abandonment cases expeditiously, while at the same time, allowing adequate time for public hearing on the vital issue of whether the public interest lies with continued rail service or abandonment. These deadlines should be sufficient guarantee that abandonments will be handled expeditiously by the Commission, and as we have previously indicated, we believe that the Commission should exercise the primary decision-making authority in these cases. But if the approach taken in section 9_403 is to be followed, we strongly recommend that the sentence beginning in line 14 on page 257 of H.R. 31 be modified to provide that any time limitation imposed on the Commission be no less than the time limits imposed on the Commission under sections 303 and 802 of Public Law 94–210. These time periods provide the minimum time necessary for the Commission to conduct a hearing into the needs of the users of the rail services involved, and at the very least, the Commission's expertise should be used to ascertain the needs of the users of rail services and how those needs can be met. This is precisely one of the functions that the Commission and its Rail Services Planning Office performed under the Regional Rail Reorganization Act of 1973, and it should continue to perform that function with regard to railroads in reorganizations. If a further hearing in court is deemed necessary—a process which we oppose-it should be limited to non-transportation matters over which courts normally have primary jurisdiction.

These are the main proposals we have for changing section 77 to produce a more efficient reorganization process. Our approach has been to eliminate duplications by giving the Commission the decision-making authority with regard to transportation matters (with normal court review) and leaving with the court the authority to decide primarily legal issues. We have also tried to take into account the landmark rail legislation embodied in Public Law 94-210. We strongly recommend that the Subcommittee take a similar approach in any legislation that it utimately reports. To this end, we would be happy to put into bill form the recommendations we have made in this statement, if the Subcommittee so desires.

This statement represents the views of the Commission except that Commissioner Corber does not join in the Commission's recommendations in the section entitled “Alternative Proposals” to the extent that they go beyond comments on H.R. 31 and H.R. 32, and Commissioner MacFarland was absent and did not participate.

This concludes my prepared remarks. We will be pleased to answer any questions that the Subcommittee might have.


STATE COMMERCE COMMISSION, ACCOMPANIED BY ROBERT BROOKS, DIRECTOR, OFFICE OF PROCEEDINGS; ARTHUR CERRA, GENERAL COUNSEL; GEORGE CHANDLER, ADVISER TO CHAIRMAN STAFFORD; JOHN MATTRAS, DIRECTOR OF FINANCE; AND THEODORE KNAPPEN, LEGISLATIVE COUNSEL Chairman STAFFORD. Since you have already introduced the men that I have at the table, I'll dispense with that, Mr. Chairman. I do have a summary statement, although you have accepted the full statement.

I am pleased to be here this morning on behalf of the Interstate Commerce Commission to discuss with you the railroad reorganization provisions of H.R. 31 and H.R. 32, two bills which would make comprehensive revisions of the laws that govern bankruptcies. H.R. 31 is the recommendation of the National Commission on the Bankruptcy Laws of the United States, and is accompanied by a report which explains the amendments made to the present law by H.R. 31 and the reasons therefor.

Although we agree with the Bankruptcy Commission that there is a need for revision of section 77 of the Bankruptcy Act, which applies to railroad reorganization cases, we do not believe that the report identifies the central issue with regard to section 77, nor do we think that it provides adequate answers to the questions that it does properly raise.

The basic question is whether section 77 is an adequate mechanism to resolve the modern-day problems of multiple bankruptcies in a region and of bankrupt railroads that are not producing enough revenue to meet operating expenses. Section 77 clearly was not adequate to meet these problems as they arose in the Northeast during the last decade, and this led to the passage of the Regional Rail Reorganization Act of 1973 and indirectly to the passage of the Railroad Revitalization and Regulatory Reform Act of 1976. These two acts brought about an infusion of Federal funds and governmental planning which have already led to the development of a streamlined new railroad in the Northeast, the Consolidated Rail Corp., and the 1976 act is intended to produce a more viable railroad system throughout the Nation. It seems to us that no revision of section 77 would be complete without taking into account the major railroad legislation of 1973 and 1976, and wihout making an effort to coordinate the provisions of section 77 with this new rail legislation. Yet the revisions to section 77 contained in H.R. 31 and H.R. 32 do not address these new rail acts.

We agree with the main thesis of the Bankruptcy Commission report that railroad reorganization cases under section 77 take too long and involve too much duplication of effort between the courts and the ICC, but we do not agree with the report's approach to solving lis problem, which is to increase the decisionmaking role of the courts in rail bankruptcies and to relegate the ICC to a mere advisory role. Decreasing the role of the ICC and increasing the role of the court makes little sense since the ICC is not primarily responsible for delays in reorganization cases and since more, rather than less, emphasis should be placed on transportation expertise in rail reorganization cases.

As to the delay question, the real delay in bankruptcy proceedings is in the length of time taken to get a plan of reorganization before the ICC, not in the length of time taken by the ICC to act on the plan or to satisfy its other obligations under the act. Moreover, the proposal transfers primary responsibility from any substantive matters from the ICC to the court when it is the ICC that has the expertise to rule in such areas as abandonments, operations and maintenance, reorganization plans, and issuance of securities. This approach is a step backward to over 40 years ago when it became evident that the court lacked the administrative expertise required in railroad reorganization and the ICC was vested with the authority to make certain substantive determinations. While section 77 is in need of improvement, the thrust of any amendment should be toward less judicialization of the process, not more.

59-591--76—pt. 4


We also must take issue with the Bankruptcy Commission's view that the essential purpose of section 77 is the protection of the creditors' rights. As the Supreme Court emphasized in the New Haven Inclusion Cases, railroad reorganizations must involve equal consideration of the public's interest in continued rail service and the constitutional issue involved in protecting the creditors' rights.

As we have previously indicated, we believe that substantial changes in section 77 are warranted, and after commenting specifically on H.R. 31 and H.R. 32, I will outline several major changes the Commission proposes.

Turning now to a discussion of the major railroad reorganization features of H.R. 31, in the important area of rail reorganization plans, the Bankruptcy Commission's proposal would virtually eliminate the ICC's responsibility with respect to the formulation of the basic plan and give us merely an advisory role.

As section 77 now stands, the Commission passes upon any plan of reorganization in the first instance, following the simultaneous filing of the plan with the Commission and the court. The reorganization court approves or disapproves the plan certified by the Commission, which may differ from any proposed. If the court disapproves the plan, it can either dismiss the proceeding or refer the matter back to the Commission.

Following court approval of the initial or modified plan, the Commission submits the plan to the security holders for a vote, and the results of that vote are certified to the court. The judge then confirms the plan if more than two-thirds of each class of security holders entitled to vote accept the plan. If such acceptance is not forthcoming, the court may, nevertheless, approve the plan if it provides fair and equitable treatment of those rejecting it and if their rejection is not reasonably jusified.

This entire process would be changed by H.R. 31 which would require that the trustees submit a reorganization plan to the court only. The court would then submit the plan to the ICC for the preparation of an advisory report to be filed within a specific time limit. Upon the filing of that report, or upon the expiration of the deadline, the court is directed to submit the plan to the stockholders, who may file objections. The court must then hold a hearing and determine whether the plan meets the criteria set out in the statute.

The Bankrupcy Commission report states that these changes provide a more efficient way to handle the plans and a speedier confirmation process. But we cannot see how the framework set up by this legislation will provide for a more expeditious achievement and finalization of a plan.

First, as noted earlier, the real delays are not so much in the confirmation process as in the waiting for the submission of a plan in the first instance. There is nothing in this legislation that would deal with this, the major problem. And second, the new standards for the plan are considerably more demanding than the present standards in that the trustee must come up with a feasible proposal that will fully compensate the creditors and stockholders and win their approval while at the same time meeting the public's interest in an adequate transportation system.

Although the proposal would not expedite the process, it would introduce into railroad reorganization law an escalation of private rights, as compared to equality between private and public interest recognized by the Supreme Court in the New Haven Inclusion Cases. While the ICC, one of whose primary concerns is the adequacy of the rail service available to the public, is reduced to the role of a mere adviser whose determinations may be ignored, a majority of the creditors and stockholders are vested with a final veto over a reorganization plan if they perceive that it does not fully satisfy their private interest. We believe that this approach denies sufficient weight to the public interest in the rail reorganization process.

The public interest is also given short shrift in that under the procedure set forth in section 9-503, there is a specific provision for hearing on how the plan suits the immediate interest and objections of creditors and equity security holders, yet there is no provision for a hearing before the Commission to determine the feasibility of the plan in terms of railroad operations and the transportation needs of the communities affected.

The proposal's tilt away from the public interest is further ag. gravated by the fact that although the ICC, the Department of Transportation, and State regulatory commissions may appear in reorganization cases, they may not appeal from any judgment or order entered in such a case.

The proposed legislation would also change the process for handling proposed abandonments of rail carriers in reorganizations. Under present section 77(0), the judge may authorize the abandonment, after hearing, but only with ICC approval. Under section 9–403 of H.R. 31, the court may authorize the abandonment regardless of whether the Commission has approved it or not. The Bankruptcy Commission offers as the rationale for this change the elimination of undue delays in the processing of abandonments by the ICC. But, as the statistics in my prepared statement demonstrate, we have not caused undue delay in the processing of abandonment cases. Furthermore, sections 303 and 802 of the new Rail Act, Public Law 93-210, impose deadlines on all phases of ICC abandonment cases, thus insuring expeditious consideration of abandonment applications.

Although H.R. 31 relegates the ICC to the position of a mere adviser on abandonment applications, whose views can be ignored, the fact is that in abandonment cases, the issues presented are essentially transportation matters within the particular expertise of the ICC. They involve questions of the carrier's capacity to continue operations as well as the public need for service, the adequacy of alternative seryice, and various other economic, social, and environmental considerations. Our long experience in handling abandonment cases has given us a greater understanding of the national and regional transportation issues than the district courts and thus a better view of how any given abandonment affects the local, regional, or national transportation system. Since abandonments involve matters which the Congress has specifically delegated to the ICC, we believe that we should play the same role in the processing of abandonments of bankrupt carriers that we play with regard to abandonments by other rail carriers.

Turning to one feature of H.R. 31 which I believe has considerable merit, section 9–303 contains a liberal provision for transfer and consolidation of rail bankruptcy cases.

Under the present system, there has been considerable delay engendered by the failure to consolidate closely related proceedings, and there has even been open conflict between courts having jurisdiction over related railroads. Certainly, no purpose is served by these developments, and section 9–303 seems precisely designed to avoid such situations.

Essentially, H.R. 32 takes the same approach to rail bankruptcies as does H.R. 31, and transfers many of the administrative functions involved from the ICC to the court. Thus, our comments on H.R. 31 are largely applicable to H.R. 32; the major differences between the two bills are briefly commented upon in my statement submitted for the record.

Although we do not support the general direction of H.R. 31 and H.R. 32, we do agree that changes should be made in section 77. The purpose of these changes should be to provide a more efficient process and one that leads to a reorganized railroad that provides optimal service to the public while meeting the rights of creditors and stockholders. To accomplish this result, it is important to eliminate some of the duplication of functions between the courts and the ICC. But we propose accomplishing this by giving the ICC the primary role in transportation and procedural aspects of rail reorganizations while giving the courts essentially a review function.

Our reason for this approach are twofold. First, it would help to relieve our overburdened court system. Second, rail reorganization cases involve primarily transportation issues; that is, determinations of what level of rail service is really essential and how much and what type of service can be retained consistent with the private rights of stockholders and creditors. These are decisions that the Commission is best qualified to make since they involve many of the same factors that are part of the Commission's day-to-day adjudications in rail abandonment, merger, and rate cases.

Specifically, we propose that the process for the submission and approval of the reorganization plan be substantially revised. First, to eliminate delays in the development of a plan, we suggest requiring the trustee, rather than the debtor, to file a plan of reorganization within 6 months of approval of the petition. Extensions could he granted, but only for good cause specifically shown and only by the Commission, which is best able to determine whether the complexity of the issues involved warrants extensions. Next, in order to insure that the plan is developed in a businesslike manner, the Commission should be given the jurisdiction to direct the trustees to develop, within set time periods, information necessary to enable the Commission to insure the expeditious development of a plan and to put before the court, the Commission, and the parties the data needed to judge the validity of a plan.

The next step is to eliminate the duplicative review functions that are so instrumental in delaying the process. We believe that the present process can be greatly streamlined by having the Commission decide on the final plan and the court review that decision, rather than ren. dering its own de novo decision, and by insuring that the creditors' and stockholders' views are considered on the record before the Commission, rainer than requiring separate submission of the plan to then after couri approval.

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