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interest is adequately protected despite an initial determination that may be adverse.

Third, consolidations and mergers. Some railroads in reorganization may be best able to reorganize through merger or consolidation. Present law, however, places unnecessary obstacles in the way of such action. First, it requires ICC approval under section 5(2) of the Interstate Commerce Act. Second, while the trustees are able to propose the plan of reorganization, the 1954 Supreme Court decision in St. Joe Paper Co. v. Atlantic Coast Line R.R., 347 U.S. 298, barred them from initiating and proposing a merger. We consider the decision inconsistent with the clear policies of section 77 in that it gives relatively powerless shareholders and directors of the bankrupt debtor-who would otherwise have little or no equity, no right to vote for acceptance or rejection of the plan, and probably no controlling interest in the reorganized corporation-an exclusive power. The result may invite stock speculation and extortive attitudes.

The bills, which lack a separate section for merger or consolidations, could be much more helpful in this important task.

First, while they give power to approve reorganization plans to the court based on its public interest determination, they are silent as to whether the requirement in section 5(2) of the Interstate Commerce Act of ICC approval for all mergers or consolidations remains in force. This should be clarified. We believe the ICC role again should be that of an advisor.

Second, while the bills require the trustee and permit the debtor, a creditor, an equity security holder, a creditors' or equity security holders' committee, or an indenture trustee to file a plan of reorganization, they do not specifically authorize any of these parties to file a plan that provides for merger of the debtor with another railroad. The problem posed by the St. Joe Paper case may therefore not be eliminated. To remedy this, we recommend that interested parties, including the trustee, be specifically authorized to file plans providing for mergers.

Third, the bills do not change the standard for mergers or consolidations that the ICC has applied in its interpretation of section 5(2) of the Interstate Commerce Act. That existing "public interest" standard has enabled the ICC to hinder needed restructuring of railroads by failing to reach a decision within a reasonable time and by dissipating the benefits of proposed mergers by imposing burdensome third-party conditions that take the economic advantage out of the merger while preserving an excess of inefficient multirailroad competition for too little traffic. The consequences for a railroad in reorganization may be fatal.

We recommend that a separate merger section include a redefined "public interest" test to be applied by the court to require timely approval of a proposed merger where the court finds that it is feasible. and consistent with a successful reorganization and where the efficiency gains of the transaction substantially outweigh any adverse effects on competition and substantially less anticompetitive alternatives are not available. Such an improved standard, which is consistent with antitrust standards in other areas, should not only make mergers in reorganizations easier; it should also better serve the public interest in continuing essential rail service.

Fourth, elimination of uneconomical lines. Additional restructuring should include the abandonment of uneconomical lines that drain revenues from railroads in reorganization. Under present section 77, such abandonments require dual approval by the court and the ICC, with the court deciding if the abandonment is "in the interest of the debtor's estate and of ultimate reorganization" and the ICC determining whether it is permitted by the "public convenience and necessity." Read literally, the statutes require separate public interest determinations by both the court and the ICC, but courts differ as to whether the reorganiaztion court must make its own determination of public interest or should merely defer to the ICC's decision on public convenience and necessity.

One difficulty with the procedure is that while the court can hold one hearing on a series of abandonments, the ICC insists on considering them in separate, piecemeal proceedings on a line-by-line basis. While the ICC has adopted regulations to shorten the time necessary for approval in uncontested or frivolous cases, and while the recently enacted Railroad Revitalization and Regulatory Reform Act of 1976Public Law 94-210-establishes deadlines for ICC consideration of abandonment, ICC proceedings will likely still be time-consuming and will very often result in denials when the amount of service involved is not trivial and the abandonment is strenuously opposed. Even if an abandonment is granted, most of the advantage may be taken away by generous labor protection granted by the Commission to displaced employees. Additional delays result because both the ICC's decision on abandonment and that of the reorganization court are appealable and will not necessarily be heard in the same circut.

This is of serious concern not only because of the delay in a final determination with its attendant losses, but also because the public convenience and necessity standard used in ICC determinations gives undue weight to shippers' needs. While it makes sense to consider the public's need for service in the case of abandoninents by a solvent railroad, we question whether that standard should be applied equally to situations where forcing a bankrupt railroad to continue to operate money-losing lines indefinitely at its own expense jeopardizes its ability ever to reorganize.

In cases where there is substantial public needs, State or local governments, the users of the line, regional transportation authorities, or solvent railroads for which the line might have value should more properly accept the burden of operation and maintenance. Indeed, the Railroad Revitalization and Regulatory Reform Act of 1976 provides a program to assist States in providing funds to continue local rail services that would otherwise be abandoned.

In an attempt to remedy these problems, the bills would give the court plenary power to decide abandonment petitions with the ICC acting on the application in the first instance. The court would set a deadline before which the ICC would have to act and, if it did not act within that time or if it denied the application, the court could order abandonment if it was "in the best interest of the estate or essential to the formulation of a plan and consistent with the public interest."

We would go further. To be consistent with the other provisions of the bills, we believe the system of duplicate approvals should be eliminated. We recommend that the court be empowered to order abandon

ment and that the only ICC role be that of a litigant in its capacity as a party to the reorganization.

Fifth, converting reorganization to liquidation. While section 77 permits dismissal of reorganization proceedings and while in some cases the equity receiverships which may follow may eventually lead to liquidation, section 77 itself lacks any provision for conversion of the reorganization to a straight bankruptcy liquidation. This reflects the underlying premise of section 77-that it is absolutely necessary to continue indefinitely the operation of a railroad in financial straits whether or not reorganization can be achieved. As a result, creditors may be denied the logical remedy even after it becomes obivous that reorganization is not achieveable.

The bills would change this by making liquidation a permissible alternative. They recognize that it is senseless to force the income-based reorganization of a railroad which has no reasonable chance for economic survival. They would permit conversion based on certain court findings.

While we support a provision allowing for such conversion, we believe the grounds set forth are too liberal to safeguard adequately the public's interest in continued rail service. So long as the debtor can be reorganized as a railroad, we believe it should be, and creditors should not have access to other options simply because they may find them preferable. Accordingly, we recommend that a court finding that the debtor is not reorganizable as a railroad be included as a prerequisite to insure that liquidation only become an option if all else fails.

In conclusion, Mr. Chairman, while we recommend that the bills grant more authority to the courts to facilitate needed restructuring, and while we favor a somewhat more limited role for the ICC, we are in general support of the approach taken by the bills before you.

By streamlining the procedures, they go far to eliminate the cumbersome, wasteful, and time-consuming process that has hampered efficient and prompt railroad reorganization. By opening the option of liquidation, they increase the parties' incentive to cooperate in achieving a workable plan. And by modifying standards for mergers, they will insure that the bankrupt estates do not suffer unnecessarily to benefit other interests. Reform of the bankruptcy laws affecting railroad reorganizations is compatible with the railroad regulatory reform and revitalization measures submitted by the Department and it is a needed step to help rehabilitate this essential industry.

Mr. Sharfman and I will be happy to respond to any questions you may have.

Mr. EDWARDS. Thank you, Mr. McCaffrey. It has been a very concise and useful statement.

Now, your testimony indicates that you are concerned about delay. However, you recommend continued jurisdiction in district courts with the understanding, I am sure, that that is going to cause delay. Mr. MCCAFFREY. In what respect, sir?

Mr. EDWARDS. Well, I understand that the bankruptcy courts' workload is generally more conducive to quick consideration than the Federal district courts.

Mr. SHARFMAN. Mr. Chairman, my experience has been in these reorganizations-and I have been working on them for many years

that the district court judges are able to give very, very expeditious consideration and do give it to railroad reorganizations. They regard them as extremely important and urgent matters, and they sit frequently. And I must say the expedition with which things are done is really exemplary. The judges really outdo themselves to try to give urgent attention to these things because they realize the tremendous public importance of them.

Mr. MCCAFFREY. I would like to add, Mr. Chairman, that we have also looked at the number of bankruptcy judges in various districts as compared with the number of district judges. While obviously the workloads of the two are different, there appears to be a greater flexibility in handling the caseload within the district court system, rather than through the bankruptcy judges, and moreover their location in the district provides a

Mr. BUTLER. Mr. Chairman, apropros this point, if the gentleman will yield, have you considered the impact of the Speedy Trial Act on the availability of Federal judges? The requirements are going to be such that they have to give criminal cases a priority not given in the past.

Mr. MCCAFFREY. I am aware of that impact and have noticed the comments of others in this regard. We have not considered specifically what impact that will have on the caseload.

On the other hand, we feel that timing is only one aspect of why we favor district courts over bankruptcy judges. We also perfer them because we find a greater likelihood of a higher caliber of judge presiding in the case and I think for both those reasons we prefer the district court.

Mr. BUTLER. Apropos this point, is there any discussion that the proposed legislation would permit the assignment of these cases to a special master or something that would be the equivalent of a chancery court? Has that been a practice in the past, or is that permitted under present legislation?

Mr. SHARFMAN. Under section 77 that is permitted. But I have found that it is not often done. The judges prefer to handle these things themselves because of the tremendous complexity of the issues.

Let me point out, since I am not sure that the committee is aware, that often these reorganizations of railroads are riddled through with a lot of assertions of complex constitutional issues of property rights and those are the kinds of things that are very difficult to assign to a

master.

Second, because of the judges' tremendous familiarity with the needs of the estate and the history of the proceeding he often finds he can deal with it on an extremely expeditious basis. I was told, for example, that Judge Fullam, who handles the Penn Central and Lehigh Vallev reorganizations and the reorganizations of all the bankrupt subsidiaries of Penn Central in Philadelphia, is able to maintain his usual load of district court cases in addition to handling all of that.

Now, one of the ways he does it is that he requires written testimony like the administrative agencies and only allows cross-examination based on the written testimony.

Mr. EDWARDS. That is not necessarily good, is it?

Mr. SHARFMAN. Well, in cases like this, it has worked out fairly well in the sense that the witnesses are there to be cross-examined. And

anybody can question what they have said. But you do not spend the tremendous amount of time developing the direct evidence.

Mr. EDWARDS. The ICC testified last Friday, and would disagree with you that they are responsible for undue delays. They say that the real problem is getting the plans submitted to them, and that the Commission itself is prompt and expeditious in its handling of railroad bankruptcy matters.

Mr. SHARFMAN. Well, Mr. Chairman, they have been a lot better in the last few years than they were in the past. I will say that. They have been making a greater effort. But the problem of delay is going to be much greater and you are going to have far more proceedings if you go before the ICC.

They hear their cases with an administrative law judge and he may or may not make a recommended decision, depending on the urgency of the time needs; then you generally have to go up usually to the Commission's Division 3; and then there is that appeal to the Commis. sioners themselves—all of which takes time. And then you have got to go to court, and have a hearing on the plan.

All of that really takes a lot of extra time, much more time than if you just went to the court to begin with.

Mr. EDWARDS. Now, with regard to the two or three other suggestions that you made-and we appreciate your testimony regarding them-do you have in your full statement any suggested amendments so that the full subcommittee in the markup could consider them? They seem to me to be useful suggestions with regard to merger and other

matters.

Mr. MCCAFFREY. Mr. Chairman, in some cases, I believe we proposed some draft language, in particular the suggestion with respect to mergers as to the public interest standard. We would be glad to provide the full text of an amendment to the bill consistent with the recommendations we have made in that statement.

Mr. EDWARDS. Thank you. The gentleman from Virginia.
Mr. BUTLER. Thank you, Mr. Chairman.

I am concerned with your reference to the problem arising from defects under section 77. On page 3, you talk about excessive delay; the second position of your statement addresses the limitation on what can be done; and then you get into means of modifying the structure of the railroads by expediting abandonments, et cetera.

On page 12 you discuss the problems of abandonment. But even if an abandonment is granted, you note most of the advantage may be taken away by generous labor protection granted by the Commission to displaced employees.

Would it also be fair to say then that the additional problems of what can be done are also problems with reference to what can be done with collective bargaining agreements?

Mr. MCCAFFREY. Mr. Chairman, we all are aware of the problems presented by collective bargaining agreements. And Mr. Sharfman can refer to his experiences with Penn Central in particular. But in our opinion, this bill does correctly follow the provisions of 77 to the extent that it would not permit a court to undo collective bargaining agreements with respect to wages or working conditions, except in accordance with the provisions of the Railway Labor Act.

The one thing we would suggest, however, that this committee give consideration to is whether the court should be given the power to

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