locutory and final orders as a matter of right, while the latter category of appeals may be taken as of right from final orders only, except where an interlocutory appeal in the latter category is one specified in 28 U.S.C. § 1292 (principally involving interlocutory injunctions and certification of questions by the district court).19

The two proposed bills differ somewhat in their treatment of appeals. H.R. 32 makes applicable to railroad reorganizations its appeal provisions generally applicable to bankruptcies, set out in section 2-209. That section vests in the U.S. Courts of Appeals jurisdiction of appeals from judgments and orders of the bankruptcy courts. Standing to appeal is given to "[a]ny person who is directly, substantially, and adversely affected," with certain exceptions not relevant here. As noted above, section 10-104 of H.R. 31 expressly gives to the Commission and DOT standing to appeal. While appeals of interlocutory orders are permitted, they may be dismissed "on the ground that review would be premature or otherwise inappropriate."

Although there is no reference in H.R. 32 to Supreme Court review, the provisions of 28 U.S.C. §§ 1252-1254 would presumably be applicable.

Section 9-106 of H.R. 31 states simply that the U.S. Court of Appeals "shall have jurisdiction of appeals from judgments and orders of district courts entered in cases under this chapter," without specifically addressing interlocutory appeals or standing. However, as noted above, section 9-105 provides that neither the Commission nor DOT may appeal from any judgment or order.

Section 9-106 (b) states that the Supreme Court shall have appellate jurisdiction of railroad reorganization cases under 28 U.S.C. §§ 1251-1254.

Both H.R. 31 and H.R. 32 provide for mandatory stay of an order of abandonment until the expiration of time for taking an appeal or, if timely appeal is made, until ultimate disposition of the appeal.

The provisions currently governing appeals are scattered throughout the Bankruptcy Act and confused by the distinction between "proceedings in bankruptcy" and "controversies arising in proceedings in bankruptcy." DOT supports H.R. 31 and 32 in doing away with this distinction and unifying the law governing appeals in a single provision. Neither bill requires that an order appealed from be final. If the right to take interlocutory appeals is expanded beyond what it has been in the past, DOT believes that it would be desirable to adopt the provision of H.R. 32 allowing dismissal of an interlocutory appeal "on the ground that review would be premature or otherwise inappropriate."

Although both bills provide for review by the court of appeals, H.R. 31 envisions original jurisdiction in the district court, while H.R. 32 would place railroad reorganizations in the bankruptcy court. If Congress decides to place railroad reorganizations in the bankruptcy court it should follow section 2-209 of H.R. 32 in providing direct appeal to the court of appeals rather than requiring a burdensome extra layer of appeal to the district court.

The legislation should also include the provision of H.R. 32 expressly giving to DOT and the Commission standing to appeal. Such a right of appeal is the quid pro quo for transfer of many of the Commission's powers to the reorganization court. On the one hand, the need to expedite proceedings requires that the Commission's role be limited. On the other hand, consideration of the public interest will remain an important factor under either of the proposed bills and the two public agencies responsible for formulating transportation policy should be accorded the status of full participants in the proceeding. Such status, including the right to appeal, is a necessary counterweight to the interest of other parties in preservation of the estate and protection of creditors' rights.

XI. EQUIPMENT OBLIGATIONS

Section 77(j) of the current Bankruptcy Act has well fulfilled the statutory goal of lending stability and confidence to railroad equipment financing. The section provides, in part, that:

"The title of any owner, whether as trustee or otherwise, to rolling-stock equipment leased or conditionally sold to the debtor, and any right of such owner to take possession of such property in compliance with the provisions of any such lease or conditional sale contract, shall not be affected by the provisions of this section."

In essence, section 77 (j) seeks to preserve in bankruptcy the rights of an equipment financier outside of the bankruptcy context. But it does not enlarge 19 5 "Collier on Bankruptcy" 177.29, pp. 599-600 (1974).

upon the rights of equipment financiers outside of bankruptcy. Rather, section 77 (j) provides that "any right" to repossess rolling-stock under a lease or conditional sale contract-whatever the attributes and limitations on that right may be is preserved in reorganization. If, in any given case, there are equitable defenses to repossession which could be interposed outside of bankruptcy-such as that the default was merely a technical one which did not prejudice the obligee-then such defenses may also be interposed when the default takes place in the context of reorganization. In view of the public interest in continued railroad operations, it is vital that the reorganization court be permitted to exercise its equitable powers to bar a repossession where, as in the case of a purely technical default, the obligee is not harmed.

The comparable proposals of H.R. 31 and 32, by contrast, both expand and contract the rights conferred by Section 77 (j) in a manner which does not appear to be desirable.

Both bills provide that:

"The right . . . to take possession of such property in compliance with the provisions of a lease or conditional sale contract shall be enforceable in a case under this chapter if the terms of such lease or conditional sale contract so provide." (H.R. 31, § 9-307 H.R. 32, § 10-305.)

In this respect, the bills go overboard in providing investor security by making absolute the right of the equipment financier to repossess in reorganization by doing away with all equitable defenses. Under the above provision, any language in the obligation must always be enforced even if a court of equity would not have enforced it if the railroad had been solvent. This provision, had it been the law, would have severely hindered the government's financing of equipment obligations under the Regional Rail Reorganization Act of 1973, which was sustained under section 77(j) by two reorganization courts. In the Matter of Penn Central Transportation Company (Bky No. 70-347, E.D. Pa., Order No. 2037 filed Oct. 8, 1975); In the Matter of Erie Lackawanna Railway Co. (No. B722838, N.D. Ohio, Order No. 431 filed Oct. 10, 1975). In view of the public interest in continued rail operations, and the importance of preserving equitable defenses to a remedy as drastic as repossession, DOT believes this to be an unwarranted expansion of rights currently conferred by section 77(j).

On the other hand, however, the proposed bills interject uncertainty into equipment financing by providing that the right of repossession is "subject to" certain of the general provisions of Chapter 4. The Bankruptcy Commission Report gives no indication why the right to repossess is made subject to rights established in other provisions. Without such an explanation, the rights of equipment obligees should not be so conditioned because to do so would in all likelihood discourage investment in equipment obligations. Therefore, DOT recommends that the language of section 77 (j) dealing with equipment obligations be retained in its present form.

TESTIMONY OF R. LAWRENCE MCCAFFREY, JR., CHIEF COUNSEL DESIGNATE, FEDERAL RAILROAD ADMINISTRATION, DEPARTMENT OF TRANSPORTATION; ACCOMPANIED BY JEROME SHARFMAN, MEMBER OF THE ATOMIC SAFETY AND LICENSING APPEAL PANEL, NUCLEAR REGULATORY COMMISSION (FORMERLY WITH OFFICE OF THE GENERAL COUNSEL, DEPARTMENT OF TRANSPORTATION)

Mr. MCCAFFREY. Thank you, Mr. Chairman. With me is Jerome Sharfman, who, until late last month, was the Department's principal trial attorney for railroad reorganizations. He has just left us to become a member of the Atomic Safety and Licensing Appeal Panel of the Nuclear Regulatory Commission, but I have prevailed on him to join me today so that the subcommittee might have the benefit of his expertise.

Recent railroad bankruptcies have significantly injured our national transportation system and caused repercussions throughout the econ

omy. No transportation problem has absorbed the attention of the Department and the Congress more in the past several years.

As you know, by 1973, railroad bankruptcies reached crisis proportions because of the extent and geographical concentration of the trackage involved, the amount of freight handled, the number of passengers and businesses affected, and the threat of cessation of essential services. Congress and the administration were forced to devise a radical approach to solving the bankruptcy problems in the Northeast and Midwest-the Regional Rail Reorganization Act of 1973-and the creation of ConRail was the result.

But while that act and its successors have taken care of the immediate problems in the affected region, we recognize that the heavy cost of extensive Federal involvement should be and could be avoided with an improved railroad reorganization statute of general applicability. Because rail industry financial problems outside the region remain severe and rates of return have been chronically anemic-last year they were only 1 percent-reorganization problems may recur. We need a sound statutory framework to handle them expeditiously and efficiently with a minimum of disruption of essential service or damage to the public and at the lowest possible cost to the general taxpayer.

Unfortunately, as our experience in the Northeast and Midwest region made clear, the present section 77 of the Bankruptcy Act-originally enacted in 1933 and given its only major revision in 1935-may be inadequate to deal with the problems of railroad reorganizations in the future.

During earlier days, the primary problem of an insolvent railroad was that it had too great a debt structure. If that debt structure could be reformed and a major portion of it converted into equity, the debtor railroad was usually able to reorganize successfully, especially in the context of the increasing economic recovery of the late thirties, the dramatic increase in railroad traffic during World War II, and the postwar boom in consumer goods. Today, in contrast, a typical debtor railroad has a negative cash flow or operating loss which it is unable to stop even after discontinuing service of its longrun debt and payment of State and local taxes. Even if it can stop such losses, it is difficult, if not impossible, to find a way to begin to generate sufficient earnings, to provide an adequate basis for a plan of reorganization and to do so within the time demanded by the constitutional rights of its secured creditors.

Combining with economic factors to hinder the trustees in their efforts to reorganize and improve the situation are the defects of section 77 itself. There are two principal defects. The first is the excessive delay entailed by the elaborate dual proceedings undertaken by the courts and the ICC and the necessity for their agreement. The second is the limitation on what can be done. While section 77 permits reorganization of the debt and capital structure, it fails to provide adequate means for modifying the physical structure of the railroad by providing an expedited basis for approval of abandonments or of mergers or consolidations with other railroads.

These basic inadequacies mean that a railroad reorganization today can too easily become a futile, enervating and prolonged holding action in which the court requires the railroad to keep operating, hoping that something-be it merger, sale, subsidies or Government take

over-will come along to pull them out of the decline and enable a sound reorganization.

Each of these bills goes far to remedy such defects. Each reflects many of our own ideas for reform. With some important modifications, a bill along these lines deserves adoption.

With your permission, I would like to discuss briefly the approach taken by the bills before you on five major issues and highlight our comments in the context of our experience under section 77. A more detailed discussion of the major provisions of the bills has been prepared and I would like to submit it for the record.

Mr. EDWARDS. Without objection, it will be accepted and printed in full. [See p. 2625.]

Mr. MCCAFFREY. First, forum. One question raised by the two bills is whether jurisdiction over railroad reorganizations should be retained in U.S. district courts, or transferred to bankruptcy judges. H.R. 31 would retain jurisdiction in the district courts as has been the case under section 77; H.R. 32 would give jurisdiction to bankruptcy judges.

While H.R. 32 would upgrade the quality of bankruptcy judges and the resources available to the judges through lengthened terms, appointment by the judicial council of the circuit, direct appellate court review of orders, and the availability of law clerks, we believe it does not go far enough to insure that such judges would be of a quality comparable to the Federal judiciary. Accordingly, absent additional provisions such as equal salary, life tenure, and presidential appointment, we recommend continued jurisdiction in U.S. district courts as being more likely to provide the higher quality of consideration which reorganizations so complex and so vital to the public interest deserve. Second, division of power between ICC and the court. Section 77 requires concurrence by both the Interstate Commerce Commission (ICC) and the reorganization court in most of the crucial steps of the reorganization. Both must approve line abandonments, agree to the appointment of trustees, concur in the range of compensation, fees and expenses awarded to trustees, attorneys, reorganization managers, committees, indenture trustees and other representatives of creditors. and stockholders, approve the issuance of trustees' certificates for financing purposes, cooperate if committees of bondholders or stockholders are authorized to solicit and act under proxies in the reorganization proceedings and permitted to intervene in the proceedings, and concur in any abandonment or sale of operating property of the debtor.

Under subsections 77 (d) and (e), the court may not approve or confirm a plan unless it has been first approved after separate proceedings by the ICC. A plan is filed with both the court and the Commission. The ICC holds hearings and reports to the court either approving, modifying, or rejecting the plan. The ICC is given additional time to issue a supplemental report modifying any plan it may approve. Once the Commission has certified a plan to the court, the court holds a hearing on any objections to the plan that may be filed and, after making its own independent findings, it may approve the plan. If the court disapproves, the plan may be resubmitted to the ICC for reconsideration.

Finally, when both the court and the ICC agree, the court submits (except in certain cases) the plan to creditors and stockholders for acceptance or rejection. The results of the vote and any valuation of property are certified to the court by the ICC. As the result of the socalled cram down provision, on certain findings, the court can confirm the plan despite an adverse vote. The provisions of the plan and the confirmation proceedings are subject to appellate review.

It is obvious that cooperation between the court and the ICC is essential to a successful reorganization proceeding under the present statute. Inevitably, however, there will be cases in which the judge and the Commission differ about how the debtor's affairs should be run or how the debtor should come out of the reorganization. At present, such a difference can result in a case bouncing back and forth between the court and the ICC, frustrating final action. Given the continuing drain on the debtor's resources, such delays can be disastrous. Even where there is agreement on most issues, there is ample evidence that normal proceedings before the ICC involve inordinate time delays with increasing likelihood of adverse consequences.

The Bankruptcy Commission found the delays resulting from this divided responsibility both unduly burdensome because of essentially duplicative hearings and appeals and overly expensive because litigation had to be conducted in more than one forum and geographic location. Instead, the Commission suggested, and both bills provide, that the court make the final evaluation of whether the plan is in the best interest of the debtor's estate, the reorganization, and the public interest. The ICC's power to veto or modify the plan would be eliminated but it could make its influence and expertise felt in an advisory role similar to that given to the Securities and Exchange Commission under the present act's chapter X.

Under both bills, the ICC, the Department of Transportation, and any State commission having regulatory jurisdiction over the debtor would have standing to appear before the district court as a party in interest. The court would submit plans found worthy of consideration to the ICC for examination with an ICC advisory report and summary to be filed within a time fixed by the court. When first the ICC report is filed or the time expires, the trustee would submit the plan and the ICC report or summaries to creditors and shareholders who would be given an opportunity to object. The court would then hold a hearing on the plan and any modifications or objections and rule on confirmation.

This streamlined procedure would eliminate the separate ICC hearing and the concept of approval before confirmation. The court would make a preliminary determination that the plan is worthy of consideration, receive the advice of the ICC, give creditors and shareholders the opportunity to object, and, finally, rule on confirmation. Because the time saved should be substantial, we support the streamlined procedure and recommend its enactment. We do believe the ICC, the Department of Transportation, and State regulatory agencies that are given the right to intervene in reorganization proceedings should have the right to appeal from decisions of the reorganization court, as do all other parties. In this respect, we favor the provision of H.R. 32, which includes the right of appeal, rather than that of H.R. 31, which does not. Providing for an appeal will insure that the public'