Opposition — Gibbons v. Atchison, Topeka & Santa Fe Railway Co.

IN THE

Supreme Court of the United States

OcTOBER TERM, 1976

No. 76-587

WILLIAM GIBBONS, Trustee of the Property of CHICAGO,

ROCK ISLAND AND PACIFIC RAILROAD COMPANY,

Debtor,

“3 P. ith ,

vs.

ATCHISON, TOPEKA AND SANTA FE RAILWAY COMPANY,

et al., and INTERSTATE COMMERCE COMMISSION,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

BRIEF IN OPPOSITION FOR RESPONDENTS

ATCHISON, TOPEKA AND SANTA FE RAILWAY

COMPANY, et al.

Howarp J. TRIENENS

MarTIN M. LUCENTE

R. EDEN MARTIN

Attorneys for Interline Railroads

SipLey & AUSTIN

One First National Plaza

Chicago, Illinois 60603

Of Counsel

TABLE OF CONTENTS

Pact

RL ee ae ES a I, l

I 2

ESE FS EE ec Oe Cee OT we On A 10

TABLE OF AUTHORITIES

PAGE

CASES:

Boston & Maine Railroad vy. United States, 162

F. Supp. 289 (1958), affd.. Boston & Maine

R. Co. v. United States, 358 U.S. 68 (1958)... 6

Chicago, B. & Q. R. Co. v. New York, S. & W.

ee eg we ee OE | See 6

Chicago, B. & Q. Co. v. New York, S&W. Ry.

ig SUE iii: PI IED viciccscccccesccceececnoiecen 7

Chicago, Rock Island & Pacific Railroad Co. v.

United States, 284 U.S. 80 (1931)... 6

Florida E. C. Ry. Co. v. United States, 368 F.

Supp. 1009 (M.D. Fla. i973), aff'd 417 USS.

RRR TEPPER cites Conan Oa ee 7

Fosdick v. Schall, 99 U.S. 235 (1878)... 1S

Incentive Per Diem Charges, 337 1.C.C. 183

(TRS ERE SERCO see ae ome 7

Incentive Per Diem Charges, 343 LCC. 49

| ARERR TINS FR eee eee ee ean 7

Incentive Per Diem Charges, 349 L.C.C. 303

RRR SS nd An ree ame 7,12, 13

iat Re Lehigh Valley Railroad Co., 508 F.2d 332

EERE me aN 12, 14, 15

In Re Penn Central Transportation Company,

oe | nee 13

New Haven Inclusion Cases, 399 US. 392

RECAST eA EIEIO» Crass RT ene oo 13

Palmer v. Massachusetts, 308 U.S. 79 (1946) ..... 13

Rules for Car-Hire Settlements, 160 1.C.C. 369.

I 3,5

Smith v. Hoboken, 328 U.S. 123 (1946) .............. 13

Thompson v. Texas Mexican Ry. Co., 328 US.

RE SR Se a enn 13

Union Pacific Railroad Co. v. United States, 300

F. Supp. 318 (D. Neb. 1969): aff'd 396 US.

SE TEE SP eae anise aren tse Kies 7

STATUTES:

Bankruptcy Act

Section 77(c)( 1), 11 U.S.C. § 205(¢)(1)........ 2

Section 77(c)(2), 11 U.S.C. § 205(¢)(2)....... 8. 11

Interstate Commerce Act

Section 1(10), 49 U.S.C.§ ITC 10) 200. 3

Section 1(14)(a), 49 U.S.C.§ 1(14)(a).......... 2.6, 7

Section 1(17)(a), 49 U.S.C.§ 1(17)(a).......... 11,12

IN THE

Supreme Court of the United States

OcToBER TERM, 1976 |

No. 76-587

WILLIAM GIBBONS, Trustee of the Property of CHICAGO,

ROCK ISLAND AND PACIFIC RAILROAD COMPANY,

Debtor,

Petitioner,

vs.

ATCHISON, TOPEKA AND SANTA FE RAILWAY COMPANY,

et al., and INTERSTATE COMMERCE COMMISSION,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

BRIEF IN OPPOSITION FOR RESPONDENTS

ATCHISON, TOPEKA AND SANTA FE RAILWAY

COMPANY, et al.

QUESTIONS PRESENTED

The two questions presented for review are:

1. Whether the Court of Appeals erred in deciding that

orders of the Interstate Commerce Commission (“Commis-

sion”) prescribing the method of determining the liability of

railroads to pay rental charges (“per diem” charges) to other

railroads for use of freight cars, the manner and time of

settlement of per diem interline balances, and the amount and

structure of per diem charges, are applicable to Chicago, Rock

Island and Pacific Railroad Company (“Rock Island”), a

railroad in reorganization under Section 77 of the Bankruptcy

Act; and

2. Whether the Court of Appeals erred in affirming the

District Court’s decision that the interline debts owed by other

railroads to Rock Island as of the date Rock Island entered into

reorganization proceedings were the net balances (if any) in

the interline accounts favorable to Rock Island.

STATEMENT OF THE CASE

On March 17, 1975, Chicago, Rock Island and Pacific

Railroad Company filed a petition for reorganization under

Section 77 of the Bankruptcy Act. On March 28, the District

Court, pursuant to Section 77(c)(1) of the Bankruptcy Act,

appointed Mr. William Gibbons to act as Trustee for the

Debtor. This appointment was approved by the Interstate

Commerce Commission on April 8, 1975.

Various pre-reorganization interline balances were and are

owed by Debtor to the twenty-three railroad respondents

(referred to herein as “Interline Railroads”). Among these are

undisputed balances in the per diem account owed by Debtor to

Interline Railroads.

Per diem charges are the charges which each American

railroad must pay for the use of another railroad’s cars. In the

early days of railroading, each railroad made its own arrange-

ments with respect to gbtaining and handling cars, including

whether it would make its own cars available for the use of

other railroads and the terms, conditions, and charges for any

such use. With the enactment of the Interstate Commerce Act

in 1887, the practice of interchanging cars rather than physi-

cally transferring the lading became obligatory.

The Interstate Commerce Act, as amended, authorizes the

Commission to regulate every aspect of the interchange and

rental of freight cars. The Commission has been empowered to

(49 US.C. § 1(14)(a)):

“establish reasonable rules, regulations, and practices with

respect to car service by common carriers by railroad

subject to this part, including (1) the compensation to be

paid for the use of any locomotive, freight car, or other

vehicle, (ii) the other terms of any contract, agreement, or

arrangement for the use of any locomotive or other vehicle

not owned by the carrier by which it is used (and whether

or not owned by another carrier, shipper, or third party ),

and (iii) the penalties or other sanctions for nonobser-

vance of such rules, regulations, or practices.””'

The Commission has exercised its regulatory authority over

both the manner and timing of settling interline per diem

accounts, and the amount and structure of per diem charges.

The Manner And Timing Of Per Diem Settlements Has Been

Prescribed By The Commission.

At an early date, the Commission exercised broad jurisdic-

tion over the method of determining the lability and manner

and time of settlement of per diem interline payments, and

ordered the railroads to comply with the rules governing car-

hire settlements which it prescribed. Rules for Car-Hire

Settlements, 160 1L.C.C. 369, 165 LC.C. 495 (1930) (hereafter

referred to as the “Per Diem Rules case’’). The Per Diem Rules

case of 1930 was instituted on the Commission’s own mouon

and concerned “the rules for car-hire setthkements between

common carriers by railroad in the United States for the use

and detention of freight cars while on the lines of carriers other

than their owners” (160 LC.C. at 372). The Commission

considered in detail the various per diem rules enforced under

the auspices of the Association of American Railroads

(“AAR”), including rules dealing with per diem charges, the

' Congress defined “car service” as follows (49 U.S.C. § 110)»:

“The term ‘car service’ in this part shall include the use,

control, supply, movement, distribution, exchange, interchange,

and return of locomotives, cars, and other vehicles used in the

transportation of property, including special types of equipment,

and the supply of trains, by any carrier by railroad subject to this

part.”

4

methods for calculating such charges, switching reclaims, inter-

change and junction reports (describing transfers of cars from

one railroad to another), and methods of settlement.2

Following its analysis of these rules and of a number of

prior Commission proceedings in which per diem charges had

been at issue, the Commission found certain of the per diem

rules to be unreasonable, but found not unreasonable Rules 11

through 17. The Commission concluded that for the future

railroads should make car-hire setthements “in accordance with

the per diem rules” (160 LC.C. at 444-45). The Commission

2 The rules dealing with per diem settlements were summarized

by the Commission as follows:

Rule 11 (Setthkement 40 days after end of calendar month:

160 L.C.C. at 396):

“Rule 11 stipulates that the car owner shall be furnished

with a per diem statement, within 40 days after the end of each

calendar month, giving the number of days each car has been in

possession of the road making the report. Upon receipt of this

information it is customary for the car owner to draw on the using

line for the amount reported, after deducting per diem if any,

which it owes the other carrier.”

Rules 12-17 (160 LC.C at 397):

“Rule 12 merely states that ‘the settlement of amounts

accruing for the use of cars shall be made monthly without regard

to reclaims pending.’ Rule 13 outlines procedures and time limits,

in connection with presentation of reclaim bills. Rule 14

authorizes the reclaim of per diem in instances where cars are in

error delivered to the wrong railroad. or delivered without

forwarding directions, etc., the erring carrier to pay the reclaim.

Rule 15 relates to responsibility for per diem accruing on cars

which a road refuses to receive, where no embargo has been

placed. Rule 16 provides that when an embargo is laid. the

issuing carrier must receive cars loaded prior to the date the

embargo was issued or be responsible for the per diem accruing

for each day it fails to receive such equipment. Rule |7 provides

for the establishment of an arbitration committee to settle cases

arising under the rules.”

then ordered that the carriers “shall make car hire settlements

direct with car owners in accordance with the per diem rules”

(Record Doc. No. 5, attached to Affidavit of J. M. Johnson ).3

3 The Commission had initially decided not to make the per diem

rules mandatory, but instead stated that “carriers will be expected to

modify their rules and practices to conform with our conclusions herein.

If this is not done within a reasonable period, the matter may be

brought to our attention for appropriate action.” (/d., at 445;

emphasis supplied) The carriers, however, did not voluntarily con-

form their rules and practices to the Commission’s conclusions, but

instead the AAR issued a circular to the member carriers stating that

the Commission’s decision did “not have the same status as an order”

so that the railroads were “not legally required to comply” with that

decision (165 LC.C at 495). The Commission thereupon made its

findings mandatory (165 1.C.C. at 496). Pursuant to this decision, the

Commission entered its Order, dated July 15, 1930, which concluded

by directing that the carriers “shall make car hire settlements direct

with car owners in accordance with the per diem rules”:

“It is ordered, That respondents herein, as shown in the

appendix hereto and made a part hereof, be, and they are

hereby, notified and required to cease and desist, on or before

October |, 1930, and thereafter to abstain, from applying rules

for car-hire settlements which are in conflict with those prescribed

for future application in the next succeeding paragraphs.

“It is further ordered, That the said respondents herein be,

and they are hereby, notified and required to establish, on or

before October |, 1930, and thereafter to maintain and observe,

rules with respect to car-hire settlements which shall provide:

* . *

“(4) That common-carrer railroads which interchange

freight cars with more than one subscriber railroad, and which

deliver to one or more subscribing carriers, freight cars which are

received from another such carner, and railroads 100 miles or

more in length, regardless of the number of railroads with which

they connect, shall make car-hire settlements direct with car

owners in accordance with the per diem rules.

. . .

“It is further ordered, That this order shall continue in effect

until the further order of the Commission.” (Emphasis supplied )

The Commission’s order prescribing the per diem rules was

sustained by the Supreme Court in Chicago, Rock Island and

Pacific Railroad Co. v. United States, 284 U.S. 80 (1931). The

Supreme Court there held that the Commission’s power to

prescribe rules with respect to “car service” included power to

promulgate “rules prescribing forms and methods of account-

ing, reporting and distributing payments in respect of such

service” (284 U.S. at 95), and ruled that the Commission’s

order “requires” the per diem charges to be paid in accordance

with the prescribed rules (284 U.S. at 92).4

The Commission Has Also Prescribed The Level Of Per Diem

Charges.

For more than six decades the railroads paid each other

per diem amounts which were determined by the AAR. In

1953, however, the AAR sought to increase the per diem rate

from $2.00 to $2.40; and several Eastern railroads refused to

pay the increased amount. Thereupon, complaints were filed

with the Commission seeking an order requiring all railroads to

observe the AAR rates. These compiaints led to the decision of

the Commission in Chicago, B. & Q. R. Co. v. New York, S. &

W. Ry. Co., 297 LC.C. 291 (1955), in which the AAR per diem

rates were held to be just and reasonable and uniform per diem

rates for all railroads were required. This decision was reversed

on appeal in Boston & Maine Railroad vy. United States, 162 F.

Supp. 289 (1958), affd.. Boston & Maine R. Co. v. United

States, 358 U.S. 68 (1958), on the ground that the Commission

had failed to consider certain matters, and the case was

remanded to the Commission for further proceedings.

Following the remand, the Commission initiated a new

proceeding under Section 1(14)(a) of the Act for the purpose

of prescribing the compensation to be paid by all railroads for

rental of freight cars in the future periods. During the

pendency of this proceeding, Congress in 1966 enacted an

4The Commission's per diem settlements order remains in full

force and effect today.

amendment to Section 1(14)(a) requiring the Commission, in

prescribing per diem charges, to give consideration to factors

affecting the adequacy of the national car supply. In response

to this amendment, the Commission initiated a new, separate

proceeding dealing with “incentive” per diem to determine

whether incentive charges would have a favorable impact on

car supply.

These two proceedings—dealing with “basic” per diem

and “incentive” charges—culminated in Commission findings

and orders prescribing in detail both the basic charges (on a

combined time and mileage basis) and also an incentive per

diem charge (applicable only to certain general service un-

equipped box cars) thereafter to be charged and paid by all

American railroads. Chicago, B. & Q. R. Co. v. New York, S. &

W. R. Co., 332 LC.C. 176 (1968), order sustained in Union

Pacific Railroad Co. v. United States, 300 F. Supp. 318 (D.

Neb. 1969), aff'd. 396 U.S. 27 (1969); and Incentive Per Diem

Charges, 337 1.C.C. 183, 217 (1970), order sustained in Florida

E. C. Ry. Co. v. United States, 368 F. Supp. 1009 (M.D. Fla.

1973), aff'd. 417 U.S. 901 (1974), and 343 LC.C. 49 (1973),

349 L.C.C. 303 (1975).

These car hire rates prescribed by the Commission were

the per diem rates in effect immediately prior to the date on

which the petition for reorganization was filed herein, and are

the rates in effect today.

Proceedings Below With Respect To Per Diem.

The District Court recognized that it did not have power to

authorize the Debtor railroad to disregard Commission orders

and rules (A. 3). However, it construed the Commission’s

orders and rules as limited to “creation of debts”—and not as

prescribing the manner and time of settlement (A. 4). It,

therefore, declined to direct Rock Island to pay the pre-

reorganization per diem amounts it owed to the other Interline

Railroads.

The Interstate Commerce Commission and the Interline

Railroads appealed from the District Court’s decision to the

Court of Appeals for the Seventh Circuit: ~The Commission

advised the Court of Appeals that in its view the car-hire rules

are binding on all railroads, including railroads in reorganiza-

tion, and that “since per diem is in reality the cost of joint

participation in the National car system binding on all railroads

bankrupt or not, not only must the level of per diem be

uniformly applied, but also the mechanics of setthement—the

timing of payment—must be uniformly applicable throughout

the industry” (LC.C. Brief, p. 14).

The Court of Appeals reversed the District Court’s decision

holding that under Section 77(c)(2) of the Bankruptcy Act.

which provides that the trustee shall operate the business of the

debter “subject to ... the jurisdiction of the Commission .. .”

(11 U.S.C. § 205(¢)(2)), Rock Island was required to comply

with the per diem rules (A. 18-19):

“In view of the mandatory nature of Commission

orders governing the settlement of per diem accounts, we

conclude that the trustee must pay these accounts as they

become due in accordance with the per diem rules. We do

not accept the reorganization court’s distinction with re-

spect to the per diem accounts between those accounts

which represent pre-reorganization car use and _ those

which represent post-reorganization car use. Since Com-

mission orders prescribe the time and manner of payment,

the trustee is in current violation of Commission orders

governing all operating railroads when he refuses to pay

per diem accounts which become due during the reorgani-

zation period. Section 77(c)(2) requires the trustee in

operation of the railroad prior to adoption of the reorgani-

zation plan to comply with all orders of the Commission.

It is clear to us that this prevision requires compliance with

Commission orders setting mandatory rules for the settle-

ment of per diem accounts.” ( Emphasis in original )

9

Proceedings Below With Respect To Determination Of

Amounts Of Pre-Reorganization Interline Balances Owed

To Rock Island.

In the railroad industry, service ts frequently provided to

shippers on a joint or collective basis with the railroads sharing

the burdens of such expenses as car ownership, repairs, loss and

damage claims, overcharges, and other costs of doing business.

The sharing of these costs gives rise to the need periodically to

settle accounts, with debtor railroads paying creditor railroads

what is owed in each of the particular interline accounts.

Pursuant to the Accounting Rules and procedures which

govern the railroad industry, interline balances are settled on a

net basis at periodic intervals. The amount paid is the net

balance in a particular interline account favorable to a particu-

lar carrier. For example, in the car repair account, one railroad

may have more credits as against another railroad ( arising out

of the repairs made by the former to cars owned by the latter)

than debits ( arising out of the repairs made by the latter to cars

owned by the former). Where a railroad has such an excess of

credits over debits at the end of a month, that railroad has a

favorable interline balance and ts entitled under the Accounting

Rules to draw on the owi.ig railroad for the amount of the net

balance.

Following commencement of the reorganization proceed-

ings, Rock Island began submitting drafts on other railroads

seeking to collect—not the net balance shown in particular

interline accounts—but rather the gross amount of any credits

in the accounts, without regard to the fact that under the

Accounting Rules the only debt to Rock Island was the net

credit balance (if any) in each account.5

5 The nature of the Rock Island’s position 1s best indicated by the

per diem account between Rock Island and Santa Fe. The account

showed credit entries of $182,502 for the Santa Fe and $105,821 for

the Rock Island. resulting in a favorable net balance of $76,681 for

the Santa Fe. Despite the fact that the Rock Island had a debit

balance in this account, it nevertheless drew on the Santa Fe in the

amount of $105,821 and refused to honor the Santa Fe’s draft for the

net balance of $76,681.

10

The District Court ruled that the agreement among the

railroads (including Rock Island) to settle interline balances

pursuant to the Accounting Rules had created a system of

‘mutual open accounts” between Rock Island and each of the

Interline Railroads, and that under this system debits and

credits within a particular account extinguish each other as they

arise leaving only the net balance (A. 8). Thus, the only debt

owed by each of the Interline Railroads to Rock Island for the

pre-reorganization period was the net balance (if any) in any

such account favorable to Rock Island.

The Court of Appeals affirmed, holding that under the

railroad Accounting Rules the only debt which Rock Island was

entitled to collect from each of the Interline Railroads was the

favorable net balance (if any) in each account (A. 25):

“There is, in effect, no debt for the gross credits on either

side. Because of this feature of the interline accounts, the

reorganization court concluded, and we agree, that the

trustee’s attempt to present drafts for the grass credits in

favor of the Rock Island on pre-reorganization interline

accounts was improper.”

ARGUMENT

1. Rock Island’s petition seeking review of the Court of

Appeals’ decision requiring compliance with the Commission’s

per diem rules and orders makes essentially two points. Rock

Island first contends that this case presents an important

unresolved issue of law dealing with the respective jurisdictions

of the Commission and the Bankruptcy Courts ( Petition, p. 6).

It then argues that the decision of the Court of Appeals is

contrary to decisions of this Court (/d., at 10) and a decision of

the Court of Appeals for the Third Circuit (id., p. 12), and that

these conflicts should be resolved by this Court.

There is no important unresolved issue of law in this case.

The issue of whether a railroad in reorganization must continue

to comply with orders of the Interstate Commerce Commission

while in reorganization was resolved long ago by Congress.

The Bankruptcy Act expressly provides that a debtor in Section

77 reorganization must comply with the Commission's orders.

Section 77(c¢)(2) of the Act states that the trustee shall operate

the business of the debtor “subject to . . . the jurisdiction of the

Commission . . .” (11 U.S.C. § 205(¢)(2) ) (emphasis sup-

plied ):

“The trustee or trustees so appointed, upon filing such

bond, shall have all the title and shall exercise, subject to

the control of the judge and consistently with the provi-

sions of this section, all of the powers of a trustee appoint-

ed pursuant to Section 72 or any other section of this title,

and, to the extent not inconsistent with this section, if

authorized by the judge. the powers of a receiver in an

equity proceeding, and, subject to the control of the judge

and the jurisdiction of the Commission as provided by

chapter | of Title 40 as on August 27, 1935, or thereafter

amended, the power to operate the business of the debtor.”

(Emphasis supplied )

Section 77(¢)(2) thus makes ut clear that a railroad in a Section

77 reorganization must operate its business subject to out-

standing Commission orders, including orders which prescribe

the manner and time of payment and the amount of per diem

charges.

The Interstate Commerce Act, like the Bankruptcy Act,

also makes it clear that the debtor in Section 77 reorganization

must comply with orders of the Commission. Section 1(17)(a)

of the Act (49 U.S.C. § 1(17)(e,) deals with “directions of the

Commission as to car service” and provides that: “It shall be the

duty of all carriers by railroad .. . , and of their officers, agents,

and employees, to obey strictly and conform promptly to such

orders or directions of the Commission |dealing with car

service }....” Section 1(17)(a) then specifically provides that

the duties of obedience extend to carriers in reorganization and

their trustees:

“[ 1 }n case of failure or refusal on the part of any carrier,

receiver, or operating trustee to comply with any such order

or direction, such carrier, receiver, or trustee shall be liable

12

to a penalty of not less than $100 nor more than $500 for

each such offense. .. .”” (Emphasis supplied )

Thus, Section 1(17)(a) expressly requires that orders involving

car service, including orders with respect to payment of com-

pensation to owning lines, must be complied with by a “receiv-

er” or an “operating trustee” or a railroad in reorganization,

such as Rock Island.

Recent judicial and Commission decisions emphasize the

principle that debtor railroads in reorganization must comply

with outstanding Commission orders. Jn re Lehigh Vailey

Railroad Co., 508 F.2d 332 (3rd Cir., 1975): Incentive Per

Diem Charges, 349 LC.C. 303 (1975).® See also Palmer v.

(1975), recognized that the burden of maintaining the national

freight car fleet ts a burden borne in common by the railroad industry.

and ruled that exempuon from the operation of the per diem

orders—-even for bankrupt railroads— would be unfair to the car-

owning railroads and contrary to the public interest. The Commission

was asked to exempt certain railroads in reorganization and other

marginal carriers from payment of incentive per diem rates. The

Commission agreed with the Administrative Law Judge that the

request for exemption should be denied (349 LC.C. at 327):

“{ T]he position of the bankrupt and marginal railroads had no

merit because they sought, in effect, to require the car-owning

railroads to subsidize them. . . .{E]xempting these latter rail-

roads would put added pressure on non-bankrupt debut lines, and

granting bankrupt and marginal railroads an exemption might

cause them to be discriminated against by non-exempt lines.”

The Commission quoted with approval from the initial decision

of the Administrative Law Judge, as follows (id., at p. 328):

“We now come to the bankrupt and marginal railroads who seek

exclusion because of their financial difficulties. These carriers are

part of the national system of railroads and their obligation to

provide the nation’s shippers with reasonable service on request

is not different from that of other companies. . . .The circum-

( Continued)

13

Massachusetts, 308 U.S. 79 (1946): New Haven Inclusion

Cases, 399, U.S. 392 (1970); Smith v. Hoboken, 328 U.S. 123

(1946): Thompson v. Texas Mexican Ry. Co., 328 U.S. 134

(1946). As this Court held in Palmer v. Massachusetts, 308

U.S. at 86-7:

“{A]n insolvent railroad, it was realized, required the

oversight of agencies specially charged with the public

interest represented by the transportation system .. . | T|he

whole scheme of § 77 leaves no doubt that Congress did

not mean to grant to the district courts the same scope as to

bankrupt roads that they may have in dealing with other

bankrupt estates.”

Nor is there any conflict among the Circuits to be resolved.

The decision of the Court of Appeals for the Third Circuit, in Jn

re Penn Central Transportation Company, 486 F.2d 519 (3rd

Cir., 1973), is not inconsistent with the decision of the Seventh

Circuit since the Third Circuit gave no consideration whatever

to the Commission’s orders prescribing the manner and time of

making per diem settlements. Accordingly, the Third Circuit

did not reach the question of whether a railroad in reorganiza-

tion may be relieved of its obligation to comply with such

orders.

In the Penn Central ligation, the Court of Appeals held

that traditional trust principles required payment of the bal-

(Continued)

stances of the financially needy roads cannot be attributed to the

car owning railroads and it would be inequitable to require the

car owning railroads to subsidize carriers who are in financial

distress.”

Accordingly. the Commission concluded that the carriers seeking

exemption had “failed to justify” any such exemption, since “the

inevitable effects of granting an exemption to a group of carriers

would be detrimental to the nonexempt carriers and to the total!

incentive per diem program.” (349 LC.C. at pp. 329-330) Petitioner

conceded in the Court of Appeals that the Commission's order in the

Incentive Per Diem case “clearly fails within the regulatory power of

the Commission” ( Brief, p. 11).

14

ances due in the freight and passenger interline accounts but

declined to extend this holding to the other interline accounts.

stating (486 F.2d at 528):

“We have concluded that amounts due in these accounts

{other than freight and passenger] are not held in trust.

These accounts do not involve collection of money by one

carrier for another. These accounts merely represent the

performance of services by one railroad.”

The Third Circuit did not refer to or consider the per diem rules

prescribed by the Commission, nor did it address itself at all to

the question of whether the railroad in réorganization (Penn

Central ) could be relieved of its obligations under those orders.

The Court of Appeals for the Seventh Circuit, in the instant

case, correctly rejected the argument that the Penn Central

decision constituted a controlling precedent, stating ( A. 20-21):

“The result in Penn Central was reached by an application

of trust principles. It is conceded in this case that trust

principles do not require immediate payment of the pre-

reorganization per diem accounts. While the existence of a

trust relationship may require payment of passenger and

freight accounts, as the court found in Penn Central, it ts

not conversely true that, in the absence of a trust relation-

ship, payment of per diem accounts is not required. We

view the question before us as essentially a question of

statutory construction and have resolved it upon a consid-

eration of the applicable provisions of Section 77 and the

policies they represent. We do not believe that our

reasoning or the result we have reached is in conflict with

the decision of the Third Circuit.”

That there is no conflict between the decision below and

any decision of the Court of Appeals for the Third Circuit with

respect to the issue here presented is confirmed by the recent

decision of that Court in Jn re Lehigh Valley Railroad Co., 508

F.2d 332 (3rd Cir.. 1975). In that case, trustees for the Penn

Central secured an order requiring payment of certain interline

balances by the Lehigh Valley. On appeal. Lehigh Valley

asserted that a condition of the 1968 merger between the Penn

Central and the New York Central, imposed by the Commis-

1S

sion in its order approving the merger, required the Penn

Central to keep the Lehigh Valley operational. Appellants

contended that the Penn Central, which was then in reorganiza-

tion, was fully bound by the conditions which the Commission

had imposed and that this condition precluded the trustees’

demand for current payment of net interline balances. In a

unanimous opinion, the Court of Appeals for the Third Circuit

held that the Penn Central reorganization court was without

authority to vary the conditions imposed on the railroad by

order of the Commission, which remained binding on the

railroad in reorganizauon (508 F.2d at 338):

* The reorganization court was without authority to vary the

conditions of Penn Central’s franchise. Only the appropri-

ate regulatory agency could do so. Smith vy. Hoboken R.R.

Co., 328 U.S. 123 (1946): Palmer v. Massachusetts, 308

U.S. 79 (1939): In re Central Railroad Co., 485 F.2d 208

(3rd Cir. 1973), cert. denied, 414 U.S. Li31 (1974).

Trustees appointed under § 77 of the Bankruptcy Act are

subject to the jurisdiction of the Commission, and a modi-

fication of condition 14 would have required application to

that agency in addition to approval by the reorganization

court. § 77(¢)(2), 11 U.S.C. § 20$(¢)(2). .. .”7 (Empha-

sis supplied. )

Accordingly, the Court of Appeals’ decision enforcing the

Commission’s per diem rules and orders is fully supported by

the applicable statutory authorities and judicial precedents, and

is fully consistent with the decisions of this Court and the Court

of Appeals for the Third Circuit.®

.

7 Petitioner also errs in asserting ( Petition, pp. 10-11) that the

decision below is in conflict with the decision of this Court in Fosdick

v. Schall, 99 U.S. 235 (1878). The Fosdick case was not cited by

Rock island to either court below and was not mentioned in the Court

of Appeals’ decision. Fosdick involved the “six months rule” under

which certain debts incurred during the six month period prior to

reorganization may be paid in certain circumstances. The decision

below was not based on the six months rule, but was instead based on

the Commission’s per diem rules and orders.

8 Petitioner also claims that the decision below would result in

the “taking of the Trustee’s property and the Debtor’s estate without

(Continued)

16

2. The decision below affirming the District Court's

decision that the only interline debts owing to Rock Island are

the net balances favorable to it in particular accounts is not

mentioned in Petitioner’s “Questions Presented” ( Petition, p.

2), and is discussed only briefly in the petition (pp. 5, 12). The

Court of Appeals’ decision on this point was based on the

essentially undisputed fact that the interline accounts of the

railroads are “mutual open accounts” in which the day-to-day

debits and credits within particular accounts are mutually

extinguished as they arise, leaving only the net balance

(A.24).9 The decision involved no important unresolved ques-

tion of federal law at all, let alone one involving any conflict

with decisions of other courts. In all other railroad reorganiza-

tions, the interline accounts have been settled on a net basis

(A.25, fn.).

(Continued)

due process or... without just compensation” in violation of the Fifth

Amendment. Petition’r cites no authority for this theory of con-

stitutional law, and it is plainly wrong.

9 Petitioner, in the only argument portion of the petition dealing

with the matter of determination of net balances owed to Petitioner.

asserts that the netting process occurring in the mutual open accounts

amounts to a “set-off (Petition, p. 12). This ts not correct. The

mutual extinguishing of debits and credits in mutual open accounts

occurs on a day-to-day basis as those debits and credits arise; thus, the

only debt in any account to Rock Island on the date that railroad

entered reorganization was the favorable net balance (if any) in such

account. The courts below did not authorize or condone any setting-

off of any such pre-reorganization debt owed to Rock Island by

another railroad against any debts owed by Rock Island to such other

railroads. .

17

CONCLUSION

For the foregoing reasons, the Petition for Writ of Certio-

rari should be denied.

Respectfully submitted,

HoOwarpbD J. TRIENENS

MARTIN M. LUCENTE

R. EDEN MARTIN

Attorneys for Interline Railroads

Siptty & AUSTIN

One First National Plaza

Chicago, Illinois 60603

Of Counsel