Motion to Dismiss or Affirm — Railway Labor Executives' Ass'n v. Gibbons

{

SUPREME COURT OF THE UNITED STATES

OcToBER TERM, 1980

RAILWAY LABOR EXECUTIVES’ ASSOCIATION,

Appellant,

WILLIAM M. GIBBONS, Trustee of the Chicago, Rock Island

and Pacific Railroad Company, Debtor; CONTINENTAL

ILLINOIS NATIONAL BANK AND TRUST COMPANY OF *

CHiCAGO, as Indenture Trustee; THE FIRST NATIONAL

BANK OF CHICAGO, as Indenture Trustee; HENRY

CROWN, et al.; THE UNITED STATES OF AMERICA;

THE INTERSTATE COMMERCE COMMISSION; and

NEIL P. GOLDSCHMIDT, Secretary of Transportation,

Appellees.

On Appeal From The United States District Court

For The Northern District Of Illinois, Sitting As

A Railroad Reorganization Court

MOTION TO CONSOLIDATE AND AFFIRM

NICHOLAS G. MANOS

332 South Michigan Avenue

Chicago, Illinois 60604

(312) 435-7494

JENNER & BLOCK

One IBM Plaza

Chicago, Illinois 60611

(312) 222-9350

RUDNICK & WOLFE

30 North LaSalle Street

Chicago, Illinois 60602

(312) 368-4000

MAYER, BROWN & PLATT

231 South LaSalle Street

Chicago, Illinois 60604

(312) 782-0600

February 18, 1981

NICHOLAS G. MANOS

Attorney for William M. Gibbons,

Trustee of Chicago, Rock Island &

Pacific Railroad Company

ALBERT E. JENNER, JR.

DANIEL R. MURRAY

BARBARA S. STEINER

DEBORAH H. BORNSTEIN

RANDALL E. MEHRBERG

Attorneys for Henry Crown, et al.

TERRY F. MORITZ

MICHAEL C. KIM

Attorneys for The First National Bank

of Chicago, as Indenture Trustee

MILTON L. FISHER

HAROLD L. KAPLAN

Attorneys for Continental Illinois

National Bank and Trust Company

of Chicago, as Indenture Trustee

! Office-Supreme Court, U.S.

(g HILED

FEB 18 198]

No. 80-1239 ALEXANDER L. STEVAS.

SLERK |

IN THE

ISSUES PRESENTED FOR REVIEW

(1) Whether the Rock Island Act’s employee protection

scheme violates the fifth amendment to the United States Consti-

tution through its uncompensated taking of the private property

of the Rock Island estate for a purported public purpose and with-

out due process of law.

(2) Whether the Rock Isiand Act’s employee protection

scheme violates the due process, separation of powers and uni-

formity in bankruptcy provisions of the United States Constitu-

tion by its summary taking of the property of the Rock Island es-

tate.

(3) Whether the oblique reference to the Tucker Act added by

the Staggers Act amendments cures the constitutional defects of

the Rock Island Act.'

‘Parent Companies, Subsidiaries and Affiliates of the appellees are

listed in Appendix C, infra.

TABLE OF CONTENTS

Page

ISSUES PRESENTED FOR REVIEW ..........046- om

TABLE OF CONTENTS. .....cccccccccvccccccvccens ii

TABLE OF AUTHORITIES........6.-eeeeeeeeeeees iii

PRELIMINARY STATEMENT ........-00eeeeeeeee 2

STATEMENT OF FACTS ......ceccccccccccesceces 3

ARGUMENT. .....cccccccccccccccccccvccsccsveces 7

I. THE DISTRICT COURT WAS MANIFESTLY

CORRECT IN FINDING THE LABOR PROTEC-

TION SCHEME OF THE ROCK ISLAND ACT

UNCONSTITUTIONAL .......eeceeeeeeeeeeees 7

Il. THE OBLIQUE REFERENCE TO THE TUCKER

ACT DOES NOT RENDER CONSTITUTIONAL

THE OTHERWISE UNCONSTITUTIONAL ROCK

ISLAND ACT ..cccccccccccccccccccvccccccsees 11

CONCLUSION ..cccccccccccccccccccccccccccvcecs 17

APPENDICES

A. Decision of Court of Appeals Affirming the District

Court’s Order of Liquidation (February 11, 1981) .. a-1

Sr Fe ee COO Be LUEO) o'c cceccensveecesees b-1

C. Parent Companies, Subsidiaries and Affiliates ...... c-l

see

TABLE OF AUTHORITIES

CASES

Armstrong v. United States, 364 U.S. 40 (1960).

Brooks-Scanlon Co. v. Railroad Commission,

Be A nt watbos ous cncaneees

Hurley v. Kincaid, 285 U.S. 95 (1932)........

In re Chicago, Rock Island & Pacific Railroad

Co., No. 80-1353 (7th Cir. Feb. 11, 1981)...

In re Chicago, Rock Island & Pacific Railroad

Co., Nos. 80-2487 and 80-2536 (7th Cir. Dec.

OD, COOP ecsccuceavcsccscccces lsecoeeaae

Railway Labor Executives’ Ass'n v. Gibbons, 100

es As Oe CEMEED op deccccccveuseds

Regional Rail Reorganization Act Cases (“3R

Act Cases’’) 419 U.S. 102 (1974) ......046-

Webb's Fabulous Pharmacies, Inc. v. Beckwith,

49 U.S.L.W. 4033 (U.S. 1980) ....... eee

ADMINISTRATIVE DECISIONS

Chicago, Rock Island & Pacific Railroad Co.—

Abandonment, 1.C.C. Report, Docket No.

AB-46 (Sub-No. 22) (May 27, 1980).......

CONSTITUTIONAL PROVISIONS

Sh Ge MONEE, © cnocutecbdeccscovestees

Page

passim

STATUTES

Bankruptcy Act of 1938, 11 U.S.C. § 205 .....

Interstate Commerce Act, 49 U.S.C.

CURT AIEI ED 06 06 cc pnssccccccdscvenves

Judicial Code, 28 U.S.C. §1252........eeee:

Railway Labor Act, 45 U.S.C. § 151, et seq. ...

Rock Island Railroad Transition and Employee

Assistance Act, 45 U.S.C. § 1001, et seq., Pub.

L. No. 96-254, 94 Stat. 339 (1980) ........

Staggers Rail Act of 1980, Pub. L. No. 96-448

CO. TS, FICO odds vinwiiicccsvevcvececs

Pucker. Amt, ZB UBL. 1G ccccccuccvccses

passim

passim

passim

No. 80-1239

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1980

RAILWAY LABOR EXECUTIVES’ ASSOCIATION,

Appellant,

Vv.

WILLIAM M. GIBBONS, Trustee of the Chicago, Rock Island

and Pacific Railroad Company, Debtor; CONTINENTAL

ILLINOIS NATIONAL BANK AND TRUST COMPANY OF

CHICAGO, as Indenture Trustee; THE FIRST NATIONAL

BANK OF CHICAGO, as Indenture Trustee; HENRY

CROWN, et al; THE UNITED STATES OF AMERICA;

THE INTERSTATE COMMERCE COMMISSION; and

NEIL P. GOLDSCHMIDT, Secretary of Transportation,

Appellees.

On Appeal From The United States District Court

For The Northern District Of Illinois, Sitting As

A Railroad Reorganization Court

MOTION TO CONSOLIDATE AND AFFIRM

William M. Gibbons, Trustee of the Chicago, Rock Island and

Pacific Railroad Company, Continental Illinois National Bank

and Trust Company of Chicago and The First National Bank of

Chicago, as Indenture Trustees, and Henry Crown, et al., sub-

stantial holders of first mortgage bonds, income debentures and

common stock of the Rock Island (‘appellees’), pursuant to

Rules 16 and 42 of the Rules of the Supreme Court of the United

States, respectfully request that this Court note probable jurisdic-

tion of this appeal, consolidate this appeal with the appeal pend-

ing in this Court in No, 80-415, and affirm the rulings of the reor-

ganization court that are the subject of these appeals on the

ground that the decisions below were so obviously correct as not

to warrant further review.

2

PRELIMINARY STATEMENT

This appeal arises from the order entered by District Judge

Frank J. McGarr on October 15, 1980, in which he refused to

vacate his injunction of June 9, 1980. That injunction is the sub-

ject of the appeal in Railway Labor Executives’ Ass'n v. Gibbons,

No. 80-415, pending before this Court. By his June 9, 1980 order,

Judge McGarr enjoined the implementation of the employee pro-

tection scheme of the Rock Island Transition and Employee Assis-

tance Act, 45 U.S.C. § 1001, et seg. (“Rock Island Act”), on the

ground that it would work an unconstitutional taking of the Rock

Island estate and violate its due process rights. Judge McGarr’s

refusal on October 15 to vacate his June 9 injunction was based

upon his finding that the Staggers Rail Act amendments to the

Rock Island Act, P.L. No. 96-448, § 701 (Oct. 14, 1980) (“Stag-

gers Act’’), merely reenacted, with only cosmetic changes, the un-

constitutional scheme contained in the original Act.

Appellees respectfully urge this Court to consolidate this ap-

peal with the appeal pending in No. 80-415 in order to cut

through the procedural morass created by Congress’ improvident

legislation and RLEA’s repeated appeals, to achieve judicial

economy, and to avoid the risk of inconsistent adjudications. Both

appeals filed by RLEA turn upon the same issue—whether

Congress may impose upon a railroad in liquidation a new labor

protection obligation. The basic issue on appeal in both cases is

whether the labor protection scheme imposed by the Rock Island

Act and reenacted by the Staggers Act is constitutional. The only

new issue raised by this appeal is whether the oblique reference to

the Tucker Act in the Staggers Act cures the Rock Island Act’s

constitutional deficiencies.

Appellees submit that Judge McGarr was entirely correct in

his determination that the Rock Island Act’s imposition of a new

$75,000,000 labor protection obligation on the bankrupt Rock

Island is unconstitutional. Appellees maintain that Judge McGarr

was also correct in ruling that the oblique reference to the Tucker

3

Act in the Staggers Act amendments does not cure the unconsti-

tutionality of the statutory scheme. Appellees therefore respect-

fully request this Court to note probable jurisdiction of this ap-

peal, consolidate this appeal with the appeal in Case No. 80-415,

and summarily affirm the decisions of the district court and the

court of appeals that the basic Rock Island Act employee protec-

tion scheme, even as amended, is unconstitutional.

STATEMENT OF FACTS

This Court is no stranger to the facts of these proceedings.’ On

June 9, 1980, Judge McGarr enjoined the implementation of the

employee protection provisions of the Rock Island Act, finding

that the $75,000,000 obligation to fund a wholly new employee

protection scheme worked an unconstitutional taking of the

property of the Rock Island estate. RLEA filed a notice of appeal

of this order to this Court on June 11, 1980, pursuant to 28 U.S.C.

§ 1252. On June 20, 1980, after further briefing and oral ar-

gument, Judge McGarr denied a motion to reconsider his injunc-

tion. The next day, RLEA filed it. application for a stay of the in-

junction before Justice Stevens, as Circuit Justice for the Seventh

Circuit. Justice Stevens denied the RLEA’s motion. The full

Court sustained his denial on June 28, 1980.’ RLEA’s appeal of

the reorganization court’s order is presently pending in this Court

in Case No. 80-415.

*Because of the provisions affecting judicial review contained in the

Staggers Act, and because of the successive appeals and applications for

stay filed with this Court by RLEA, this Court has already received a

number of filings concerning the underlying facts and the legal questions

raised by the Rock Island Act and the Staggers Act. Appellees respect-

fully refer the Court to Appellee’s Motion to Affirm, RLEA v. Gibbons,

No. 80-415 (U.S., motion filed Dec. 17, 1980) (hereinafter, “Motion to

Affirm”), for a more detailed discussion of the statutory scheme, the

facts, and the legal issues presented by the Rock Island Act and the

Staggers Act.

*RLEA v. Gibbons, 100 S. Ct. 2668 (Stevens, Circuit Justice, June 28,

1980) (opinion denying stay application); 100 S. Ct. 3057 (July 2, 1980)

(order denying stay application) (No. 80-415).

4

Congress was displeased with the judicial branch’s protection

of the Rock Island estate from an unconstitutional taking but was

still unwilling to appropriate public funds to pay for labor protec-

tion. Therefore, on September 29, 1980, Congress passed amend-

ments to the Rock Island Act as part of the Staggers Act. The

amendments reenacted, without substantial alteration, the same

scheme for the imposition of a new $75,000,000 labor protection

obligation on the Rock Island estate which was contained in the

original Act. Compare Section 701(b)(1) of the Staggers Act

with Section 106 of the Rock Island Act.

While the Staggers Act corrected some procedural defects in

the original Act,‘ Congress’ only effort at curing the unconstitu-

tionality of the actual taking was limited to the addition of Sec-

tion 124(c) to the Rock Island Act. This section provides that

“nothing in this Act. . . shall limit the right of any person to com-

mence an action in the United States Court of Claims under...

the Tucker Act”.

Based upon the proposed Staggers Act amendments to the

Rock Island Act, on October 7, 1980, RLEA requested Judge

McGarr to vacate his earlier order declaring the Act unconstitu-

tional. On October 15, 1980, after the Staggers Act had become

law and after the submission of additional briefs and oral ar-

gument, Judge McGarr found that the amendments failed to cure

the Act’s constitutional infirmities or remedy the irreparable in-

jury which would be suffered by the Rock Island estate were the

Act to be implemented. Consequently, the court refused to vacate

its earlier order. Judge McGarr ruled that the Act remained un-

constitutional:

This court has studied the Staggers Rail Act amendments

to the Rock Island Act, has reviewed carefully the arguments

of counsel, the documents filed by the various parties, the

‘Section 106(d)(1) of the original Act, which precluded any Commis-

sion or judicial stay of an order imposing labor protection under the Act,

and the last sentence of § 106(d)(2), which precluded review by this

Court, were eliminated.

5

ruling of June 9, 1980, and the court’s knowledge of these

proceedings, and it remains clear that the Rock Island estate

continues to be exposed to irreparable injury by the provi-

sions of the Rock Island Act a: amended by the Staggers

Rail Act. The Staggers Rail Act does not cure the defects

found in the Rock Island Act. Like its predecessor, the Stag-

gers Rail Act imposes a $75,000,000 cost of administration

claim on the Rock Island estate with priority over claims of

general creditors and shareholders on the assets of the estate.

Petitioner argues that the statutory scheme can be im-

plemented, the money disbursed, and the validity of the pro-

gram and extent of the Rock Island liability to finance it,

later litigated. This, in fact cannot be done without irrepara-

ble injury to the administration of the estate for the benefit of

the creditors. The trustee is currently liquidating assets and

preparing the plan for distribution to creditors. Under court

order, the trustee is also preparing an interim plan for the

immediate partial satisfaction of cost of administration

claims. The imposition of a $75,000,000 uncertainty on the

estate will totally halt the liquidation for the long period con-

sumed by the appellate process, with irreparable injury to

the already long-suffering creditors. Further, the whole

liquidation plan will be distorted by the brooding omnipres-

ence of a potential liability representing a significant percent-

age of the total assets.

Order of October 15, 1980, at 3-4 (RLEA Jurisdictional State-

ment App. B-1 at Sa).

Although the appeal from Judge McGarr’s June 9 injunction

remained pending in this Court, Section 701(a)(1) of the Staggers

Act also added a new provision on judicial review to the original

Act. Section 124 mandated that an appeal from any decision of

the reorganization court respecting the constitutionality of the

amended Rock Island Act must be taken to the Court of Appeals

for the Seventh Circuit (notwithstanding the pendency of appeals

of the June 9 injunction in this Court), that the appeals must be

heard en banc, and that the court of appeals must render its final

decision within 60 days of the filing of the last appeal. Con-

6

sequently, RLEA appealed from Judge McGarr’s denial of its

motion to vacate the June 9 injunction to the court of appeals.’ But

the forum thought by Congress and RLEA to be most favorable,

the Seventh Circuit, did not sustain the constitutionality of this

unprecedented legislation and affirmed Judge McGarr’s decision.°

On December 31, 1980, the court of appeals also denied

RLEA’s motion for an “emergency” stay of the district court's

order.’ Nearly one month later, RLEA filed another “emergency”

application with Justice Stevens to stay the district court’s order.

That motion was also denied, whereupon RLEA applied to Jus-

tice Rehnquist for a stay. This third application for a stay now

pends before this Court. .

‘In an effort to overcome this extraordinary Congressional circumven-

tion of the usual appellate process prescribed by 28 U.S.C. § 1252, and

in order to accelerate judicial review, appellees submitted to this Court a

petition for certiorari before judgment by the court of appeals and a mo-

tion for expedited consideration thereof. Gibbons v. RLEA, No. 80-704

(US., petition for cert. filed Oct. 30, 1980). Despite RLEA’s professed

desire for a speedy final adjudication of the constitutionality of the Rock

Island Act, RLEA did not support appellees’ efforts for expedited

review, presumably because RLEA did not wish to forego consideration

of its appeal by the forum Congress had specially legislated on RLEA’s

behalf despite the pending appeal in this Court.

*In re Chicago, R. 1. & P. R. R., Nos. 80-2487 and 80-2536 (7th Cir.

Dec. 16, 1980).

"In re Chicago, R. 1. & P. R. R., Nos. 80-2487 and 80-2536 (7th Cir.

Dec. 31, 1980) (order denying motion for stay). In its application to Jus-

tice Rehnquist, RLEA represents that “on December 31, 1980, the court

of appeals, granted RLEA's request to stay that preliminary injunction,

contingent upon this Court's granting a stay of the original injunctive

order of June 9, 1980." Application By Appellant Railway Labor

Executives’ Association for Stay of Preliminary Injunction Affirmed By

an Equally Divided Court of Appeals, RLEA v. Gibbons, No. A-640 at 3

(US., application filed Jan. 28, 1981) (emphasis supplied). In truth, the

court of appeals denied the stay application. Constrained by the en banc

decision on the merits, affirming Judge McGarr’s finding that the Rock

Island Act as amended remained unconstitutional, and by this Court's

denial on July 2, 1980 of RLEA’s stay application, the court of appeals

simply instructed the RLEA to look to this Court for the relief it seeks.

7

ARGUMENT

I.

THE DISTRICT COURT WAS MANIFESTLY CORRECT IN

FINDING THE LABOR PROTECTION SCHEME OF THE

ROCK ISLAND ACT UNCONSTITUTIONAL.

When Judge McGarr, who has presided over these proceedings

since their inception, found that the Rock Island had fulfilled its

public service obligations and that it thus had no further em-

ployee protection obligations, he had before him a destitute rail-

road that had served the public interest, in derogation of the inter-

est of the creditors and shareholders, for five years.

The Rock Island filed for reorganization under Section 77 of

the Bankruptcy Act of 1938, 11 U.S.C. § 205, on March 17, 1975,

following a decade of devastating losses that totalled $103.4 mil-

lion.’ Judge McGarr, over the objections of the creditors and share-

holders, caused his Trustee to continue rail operations during the

ensuing four and one half years in an attempt to preserve rail ser-

vice pursuant to the public interest objectives of Section 77.

Massive operating losses resulted. In the period from January |,

1975 through September 30, 1979, the Rock Island incurred

losses in excess of $178.4 million.’ By the summer of 1979, the

Trustee’s cash reserves had deteriorated to the point where the

Trustee was unable to pay his operating expenses." Thus, at a cost

to the creditors and shareholders of over $175 million in operating

losses, the jobs of Rock Island employees were preserved for a pe-

riod of almost five years after the filing of the Section 77 petition.

‘See Response of Intervenors Crown, et al. to Trustee’s Report for

1978 and Four Months 1979 at 30 (Sept. 6, 1979), reprinted in Sup-

plemental Appendix to Appellees’ Motion To Affirm, filed Dec. 17, 1980

(hereinafter, “Supp. App. *) at H-7.

*Id., Income Statement-1979 (Supp. App. G-15).

"Id., 1CC Directed Service Order No. 1398, Appendix A, 44 F.R.

56,343 at 56,352-54 (1979).

8

Notwithstanding the financial disaster that had befallen the

Rock Island, the Brotherhood of Railway and Airline Clerks and

the United Transportation Union, represented in these proceed-

ings by RLEA, struck the Rock Island on August 28, 1979." On

September 20, 1979, President Carter appointed an emergency

board pursuant to Section 10 of the Railway Labor Act, 45

U.S.C. § 151, et seqg., thereby mandating a return to work by the

Rock Island employees." Contrary to Judge McGarr’s expecta-

tions," and in defiance of President Carter’s order, the Rock Is-

land employees refused to return to work.

On September 26, 1979, the Interstate Commerce Commission

ordered the Kansas City Terminal Railway Co. to onerate and

provide directed service over the lines of the Rock Island, based

upon “the specific finding that [the Rock Island’s] cash position

makes its continuing operation impossible” and that the Rock

Island “suffers from the type of ‘cashlessness’ described in 49

U.S.C. § 11125 (a) (1).”" Since that date, the Rock Island estate

has had no railroad operations.

On January 21, 1980, Peat, Marwick, Mitchell & Co., the

court’s own expert, filed its report with the reorganization court.

The report concluded that the Rock Island was not reorganizable

as an ongoing railroad even if pared to its most profitable core.

Report of Peat, Marwick, Mitchell & Co. (Jam. 21, 1980).

"The striking unions insisted upon payment of retroactive wage in-

creases before agreeing upon even miminal work rules changes which

the Trustee had sought in order to reduce costly waste and featherbed-

ding. The retroactive wage increases in dispute would have cost the

Rock Island estate $14 million—an amount of money the unions knew

to be unavailable to the Trustee. The Trustee's position was that costly,

inefficient work rules must be eliminated before he could pay wage in-

creases. Report of Emergency Board No. 191 (Oct. 22, 1979) (Supp.

A-4-6).

“Directed Service Order No. 1398, supra note 3.

9

Based upon these circumstances, on January 25, 1980, Judge

McGarr found that “a continuation of the Rock Island on an in-

come producing basis, whether in core or in whole or in part... is

just not possible. . . .” Transcript of Proceedings, Jan. 25, 1980, at

100. Judge McGarr thereupon ordered his Trustee to commence

the liquidation of the Rock Island. /d. at 97."

The court’s finding that the Rock Island was not reorganizable

as an Ongoing railroad was subsequently confirmed by the Inter-

state Commerce Commission in a report to the reorganization

court on May 27, 1980. The Commission concurred in the view

that the Rock Island “has no realistic hope for reorganization or

continued public service in its present form.” Chicago, Rock Is-

land & Pacific Railroad Co.—Abandonment, Interstate Com-

merce Commission Report, Docket No. AB-46 (Sub-No. 22)

(May 27, 1980) at 4 (Supp. App. I-4).

On June 2, 1980, Judge McGarr confirmed the total abandon-

ment of all Rock Island lines and discontinuance of service. Citing

Brooks-Scanlon Co. v. Railroad Commission, 251 U.S. 396

(1920), and its progeny, Judge McGarr found that the Rock Is-

land’s abandonment of its entire railroad system was constitution-

ally mandated and that to force the Rock Island to continue oper-

ations indefinitely at a loss would constitute a violation of the fifth

amendment rights of the creditors and shareholders. Consistent

with the ICC’s own precedent, the equities of the Rock Island sit-

uation, and because the Rock Island was constitutionally entitled

to withdraw from rail operations, Judge McGarr also found that

no labor protection obligations could be imposed in connection

with the Rock Island’s total line abandonment. Order No. 248

(June 2, 1980) (App. B, infra, at b-1).

"Judge McGarr’s liquidation order of January 25, 1980, was affirmed

by the United States Court of Appeals for the Seventh Circuit on Feb-

ruary 11, 1981. The court’s opinion is reprinted in Appendix A, infra. In

re Chicago, R. 1. & P. R. R., No. 80-1353 (7th Cir. Feb. 11, 1981).

10

In essence, the reorganization court decided that having sus-

tained immense losses in the service of the public during five years

of attempted reorganization under Section 77, the Rock Island

could no longer be compelled to devote its own resources to

further the public interest." As is 1 lly set forth in the Motion to

Affirm at 10-16, the limited period during which Rock Island’s

creditors and shareholders can be assumed to have agreed to com-

mit the estate’s resources to the public’s transportation needs has

long passed, and can be extended no further, consistent with the

fifth amendment. Because the Rock Island estate can no longer be

required to continue to devote its resources to advance national

transportation policy, a fortiori, it cannot be required to further a

component of that policy through new employee protection ob-

ligations.

RLEA repeatedly alludes to the unfortunate plight of the

former employees of the Rock Island who have lost their means of

livelihood as a result of the railroad’s liquidation. See, e.g., RLEA

Jurisdictional Statement at 8. RLEA ignores the fact that the

creditors and shareholders of the Rock Island have already sus-

tained immense losses while the jobs of the Rock Island’s em-

ployees were preserved for five years following the filing of the

reorganization petition. RLEA also fails to mention the role that

its own members played in the demise of the Rock Island, when

its two largest unions struck the Rock Island at its most desperate

hour. Finally, RLEA ignores the fact that, to the extent the Rock

Island Act’s labor protection program is necessary to further

national transportation policies, the fifth amendment, Brooks-

“The Seventh Circuit Court of Appeals, in rejecting the argument of

the RLEA that the Rock Island should not be permitted to liquidate, ob-

served:

“... the history of this case indicates that the reorganization

court has duly considered the public interest throughout the reor-

ganization proceedings and has determined that continued opera-

tion of the Rock Island no longer serves the pubiic interest.”

In re Chicago, R. 1. & P. R. R., No. 80-1353, slip op. at 12 (App. A, in-

fra, at a-15).

11

Scanion and its progeny require that the government, and not the

bankrupt Rock Island estate, pay the cost of the public benefit.”

In addition, the Rock Island Act plainly violates the constitu-

tional principles of due process, separation of powers, and equal

protection. As is more fully set forth in the Motion to Affirm, at

17-21, the Rock Island Act is replete with constitutional defects.

First, the Rock Island Act violates the separation of powers doc-

trine by directing the reorganization court to impose without

judicial review any labor protection arrangement ordered by the

Commission. Second, the Rock Island Act violates the due

process and separation of powers principles by its extraordinary

curtailment of appellate review, including its attempt to mandate

en banc review by the Seventh Circuit within a 60 day period.

Third, the Act unconstitutionally singles out the Rock Island,

thus offending the due process and equal protection clauses of the

fifth amendment and resulting in special punitive legislation

which the constitutional prohibition against bills of attainder was

designed to prevent. Finally, the Rock Island Act violates the con-

stitutional requirement that bankruptcy laws be uniform.

For all of these reasons, the reorganization court was manifest-

ly correct in its finding that the Rock Island Act, even as amended

by the Staggers Act, is unconstitutional.

THE OBLIQUE REFERENCE TO THE TUCKER ACT DOES

NOT RENDER CONSTITUTIONAL THE OTHERWISE

UNCONSTITUTIONAL ROCK ISLAND ACT.

RLEA’s motion to vacate Judge McGarr’s June 9 injunction

and its appeal of his refusal to do so are premised on the Staggers

"As this Court stated in Webb's Fabulous Pharmacies, Inc. v. Beck-

with, 49 U.S.L.W. 4033, 4035 (U.S. 1980), quoting Armstrong v. Unit-

ed States, 364 U.S. 40, 49 (1960):

“{t}]he Fifth Amendment’s guarantee ... was designed to bar

Government from forcing some people alone to bear public burdens

which, in all fairness and justice, should be borne by the public as a

whole.”

12

Act’s addition of Section 124(c) to the Rock Island Act. That

Section provides that:

Nothing in this Act... shall limit the right of any person to

commence an action in the United States Court of Claims

under section 1491 of title 28, United States Code (common-

ly referred to as the “Tucker Act’’).

As is set forth in detail in the Motion to Affirm, at 21-27, the addi-

tion of this oblique reference to the Tucker Act does not cure the

many constitutional defects that otherwise exist in the Rock Is-

land Act.

The reference to the Tucker Act in Section 124(a) does not

provide any certainty that the government will fund the labor pro-

tection scheme. Indeed, the bare mention of the Tucker Act with-

out more is as vague as the suggestions concerning the availability

of a Tucker Act remedy that were advanced in support of the

original Act, suggestions which Justice Stevens found to be

“equivocal” at best. RLEA v. Gibbons, supra, 100 S.Ct. at 2671.

To pass constitutional muster, this Court has heretofore required

“reasonable, certain and adequate”’ provisions for compensation

at the time of the taking. Regional Rail Reorganization Act

Cases (““3R Act Cases’), 419 U.S. 102, 156 (1974). Although

many unequivocal alternatives were available to Congress to meet

this requirement, the loose and noncommitta! language of Section

124(a) simply does not rise to that level.

Both cases relied upon by RLEA in its Jurisdictional State-

ment at 22-24 to circumvent this conclusion are inapposite. Hur-

ley v. Kincaid, 285 U.S. 95 (1932), involved specific real property

which the government required to build a vitally needed floodway.

Unquestionably, the government would have to compensate the

owner for any flooding of his property. The only question deferred

for later determination was the amount of compensation.

13

Similarly, in the 3R Act Cases, the government had an emer-

gent need for the rail lines of the Penn Central because those lines

were essential to the economy of the Northeast. The Government

conceded at the outset that a taking had occurred and that some

compensation must be paid. Congress therefore appropriated

$1.5 billion in cash and securities as compensation prior to the

transfer, which amount could be adjusted in the subsequent

Tucker Act proceeding. 3R Act Cases, 419 U.S. at 128. Thus, the

existence of a taking and the requirement of some governmental

compensation of the Penn Central estate was not at issue in the

3R Act Cases.

By contrast, here the government has not conceded that any

taking has occurred or that the Rock Island estate has a right to

any compensation. Moreover, here the government has no emer-

gent need for specific property of the Rock Island. Unlike unique

rail properties that are essential to a regional economy or land

that must be used for a floodway, here $75,000,000 in cash, a

completely fungible commodity, is to be taken by the government.

It would be absurd to contend that the government has a pressing

need for the cash of a bankrupt railroad in liquidation. The

government may not use the Tucker Act to justify the seizure of

$75,000,000 in totally fungible cash on the promise of “pay

now — litigate later,” any more than the government could justify

the attachment of an individual citizen’s bank account with the

mere statement that he is not precluded from the opportunity to

file a Tucker Act proceeding in the court of claims at a later date.

Accordingly, the cases relied upon by RLEA to suggest that a

possible later Tucker Act “remedy” cures an unconstitutional

taking do not support that conclusion.

RLEA attempts to minimize Judge McGarr’s finding that the

“brooding omnipresence of a potential liability representing a

significant percentage” of the Rock Island’s total assets would

seriously disrupt the liquidation of the estate. Order of October

14

15, 1980, at 3-4 (RLEA Jurisdictional Statement App. B-1 at

Sa). RLEA argues that the potential liability will remain

. uncertain in any event until a final resolution of this appeal. See

Jurisdictional Statement at 23-24.

However, the reorganization court’s findings are rooted in and

clearly supported by the troubled history of the Rock Island, with

which Judge McGarr is intimately familiar. Within the last six

years, the Rock Island has twice failed to meet its obligations to

its trade creditors.” In light of these two prior defaults in

payments to trade creditors, and in light of existing expenses of

administration that may exceed $195,000,000," the imposition of

a $75,000,000 expense of administration on this estate creates a

serious risk that trade creditors henceforth will be unwilling to

deal with the Trustee on any basis other than cash in advance.

If the cost of administration claimants were to insist upon the

impoundment of all or most of the proceeds arising from the sale

of Rock Island assets, as some have already requested,” the Trus-

tee’s ability to obtain funds with which to pay the expenses of

liquidation could be fatally impaired. Absent these funds, the or-

derly liquidation now under way could quickly become a sham-

bles, at great loss to the creditors and shareholders of the Rock Is-

land estate.”

"For a complete recitation of these prior defaults, see Memorandum

of the Trustee, Creditors and Shareholders In Opposition To the Appel-

lant RLEA’s Application For a Stay of the Preliminary Injunction Is-

sued By the District Court and Affirmed By the Court of Appeals for the

Seventh Circuit, RLEA v. Gibbons, No. 80-1239 at 15-17 (US.,

memorandum filed Jan. 27, 1981) (hereinafter, ““Appellees’ Memoran-

dum in Opposition to Stay”).

"See Proposed Plan of Reorganization for Chicago, Rock Island &

Pacific Railroad Company, filed on Dec. 28, 1979 at 19.

“For more detailed information, see Appellees’ Memorandum in Op-

position to Stay at 16-19.

See Objection of United States Leasing International, Inc., to Trus-

tee’s Petition for Order Authorizing and Approving Sale and Other

(Footnote continued on following page)

15

RLEA argues that the cash position of the Trustee will not be

harmed and, consequently, the orderly liquidation will not be im-

paired because “Congress has provided a funding mechanism to

supply the monies needed to implement Section 106” so that the

Trustee “need not expend one penny of estate funds until after

this appeal is resolved and he repays the Government.” Jurisdic-

tional Statement at 24. RLEA assumes that the Trustee will be

able to borrow the necessary $75,000,000 from the government,

pursuant to Section 110 of the Rock Island Act. There is, how-

ever, absolutely no assurance that the Trustee will be able to ob-

tain a government loan.

Section 110 provides that labor protection payments be funded

from a government loan or from the assets of the Rock Island

estate. The government is not obliged to lend the Rock Island

money. A new President and a new Congress now have taken

office, who are not subject to election year exigencies and face an

economic and budgetary crisis that mandates paring federal

expenditures in every possible way. RLEA has no basis for

assumii.g that the new administration will be disposed to loan

$75,000,000 to the Rock Island. Indeed, the new administration is

likely to look with disfavor on the fiscal sleight of hand proposed

by RLEA—that the money be paid out now subject to a later

court of claims determination as to whether the government must

assume the cost. RLEA undoubtedly favors this back-door

method of financing (through use of the Tucker Act) because it

knows that the new Congress and the new President are unlikely

to make a straightforward Treasury appropriation of $75,000,000

for this purpose.

Regardless of whether the labor protection scheme is funded

from the assets of the Rock Island or by a government loan

(Footnote continued from previous page)

Transactions Relating to Locomotives, Inventory, and Silvis, Illinois,

Properties at 8, Dec. 18, 1980 (Supplemental Appendix of Trustee,

Creditors and Shareholders, filed Jan. 27, 1981, at E-8).

16

occupying expense of administration status, the result will be to

disrupt a speedy and orderly liquidation. Significantly, RLEA

conceded in its Stay Application to Justice Stevens that “until the

validity of Section 106 is resolved, there cannot be any meaningful

plan to distribute the estate’s assets.” Application by Appellant

Railway Labor Executives’ Association for Stay of Preliminary

Injunction, Railway Labor Executives’ Ass'n v. Gibbons, No. A-

640 (application filed Jan. 22, 1981) at 10. To relegate the estate

to a later proceeding in the court of claims, with no assurance of

ultimate payment, would be to subject the estate and its creditors

to a severe disruption in the liquidation proceedings, delaying for

years the formulation and implementation of a meaningful plan

of reorganization. Judge McGarr was, therefore, manifestly cor-

rect in finding that the question of the Rock Island Act’s constitu-

tionality is ripe for determination now and should not be deferred

to a subsequent court of claims proceeding. The Trustee, creditors

and shareholders respectfully subrnit that the only way to prevent

further disruption to the estate and the harm to its creditors and

shareholders is now to affirm Judge McGarr’s finding that the

Rock Island Act is unconstitutional.

17

CONCLUSION

For the foregoing reasons and for the reasons stated in the Mo-

tion to Affirm, appellees respectfully request that this Court note

probable jurisdiction of this appeal, consolidate it with Case No.

80-415, and affirm the reorganization court’s orders of June 9,

1980 and October 15, 1980.

Of Counsel:

NICHOLAS G. MANOS

332 South Michigan Avenue

Chicago, Illinois 60604

(312) 435-7494

JENNER & BLOCK

One IBM Plaza

Chicago, Illinois 60611

(312) 222-9350

RUDNICK & WOLFE

30 North LaSalle Street

Chicago, Illinois 60602

(312) 368-4000

MAYER, BROWN & PLATT

231 South LaSalle Street

Chicago, Illinois 60604

February 18, 1981

Respectfully submitted,

By

Nicholas G. Manos

Attorney for William M.

Gibbons, Trustee of the

Chicago, Rock Island &

Pacific Railroad Company

By

Albert E. Jenner, Jr.

Daniel R. Murray

Barbara S. Steiner

Deborah H. Bornstein

Randall E. Mehrberg

Attorneys for Henry Crown

et al.

By

Terry F. Moritz

Michael C. Kim

Attorneys for The First

National Bank of Chicago,

as Indenture Trustee

By

Milton L. Fisher

Harold L. Kaplan

Attorneys for Continental

Illinois National Bank and

Trust Company of Chicago,

as Indenture Trustee

APPENDIX A

DECISION OF COURT OF APPEALS AFFIRMING

THE DISTRICT COURT’S ORDER OF LIQUIDATION

FEBRUARY 11, 1981

United States Court of Appeals

For the Seventh Circuit

Chicago, Illinois 60604

February 11, 1981

Before

Hon. ROBERT A. SPRECHER, Circuit Judge

Hon. HARLINGTON WOOD, JR., Circuit Judge

Hon. WESLEY E. BROWN, Senior District Judge*

IN THE MATTER OF:

CHICAGO, ROCK ISLAND & PACIFIC | Appeal from the

RAILROAD COMPANY United States

Debtor. District Court for the

No. 80-1353 . Northern District of

Illinois, Eastern Division.

APPEAL OF:

RAILWAY LABOR EXECUTIVES’ No, 75 B 2697

Frank J. McGarr, Judge.

ASSOCIATION,

Intervenor.

*Honorable Wesley E. Brown, Senior District Judge for the District

of Kansas, is sitting by designation.

a-2

ORDER

This case presents one aspect of the continuing saga of the de-

cline of the Chicago, Rock Island and Pacific Railroad Company

(“Rock Island”). There are two questions before us in this appeal:

(1) Did the district court, sitting as a railroad reorganiza- ~

tion court under Section 77 of the Bankruptcy Act, 11

U.S.C. §205, have the discretion to determine that the Trus-

tee’s plan of reorganization was unworkable and to refuse to

transmit that plan to the Interstate Commerce Commission

(“ICC”)?

(2) Did the district court, sitting as a railroad reorganiza-

tion court, have the authority to order the Trustee to com-

mence liquidation of the railroad?

The Railway Labor Executives’ Association (““RLEA”) argues

that we should reverse the district court’s order directing the

Trustee to liquidate the Rock Island estate and that we should

order the district cour: to transmit to the ICC the plan of reorga-

nization filed by the Trustee on December 28, 1979. The Trustee

of the Rock Island, William M. Gibbons, and various creditors of _

the Rock Island (“Creditors”)' ask us to dismiss this appeal as

moot or to affirm the actions of the district court.

On March 17, 1975, the Rock Island filed a petition for reor-

ganization in the United States District Court for the Northern

District of Illinois under Section 77 of the Bankruptcy Act, 11

'The parties referred to collectively as “Creditors” are as follows:

First National Bank of Chicago and Continental Illinois National Bank

and Trust Company of Chicago, in their capacities as indenture trustees,

and Henry Crown, et al., holders of first mortgage bonds, income deben-

tures and common stock of the Rock Island.

The Trustee joined in the Creditors’ Brief solely on the ground that

the liquidation is not reversible and is so far advanced that any delay

would be physically and economically impossible.

a-3

U.S.C. §205.’ Judge McGarr was assigned to act as the reorga-

nization court. On March 28, 1975, William M. Gibbons was ap-

pointed Trustee of the Rock Island and was instructed to manage

and operate the debtor’s railroad system.

Section 77(d) provides that “[t]he debtor, after a petition is

filed... ., shall file a plan of reorganization within six months of

the entry of the order by the judge approving the petition as

properly filed... .” 11 U.S.C. §205(d). The reorganization court

several times extended the deadline for the Trustee to file a plan

of reorganization. The Trustee filed his Plan of Reorganization

(“Plan’’) on December 28, 1979.’ An informational copy was fur-

nished to the ICC in accordance with Bankruptcy Rule 8-301(c).

On January 8, 1980, the court entered Order No. 221. In that

order the court found: it had jurisdiction pursuant to Bankruptcy

*The Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat.

2549 (1978), enacted November 6, 1978, codified and changed the prior

Bankruptcy Act, including former Section 77. Section 403(a) of the

Bankruptcy Reform Act, 92 Stat. 2683, however, provides that pending

reorganizations, such as the one at bar, were to be governed by the

previous law except for a few exceptions set forth in Section 403(b).

*Throughout the five years of reorganization prior to the filing of the

Plan, the Rock Island suffered significant financial losses. The ICC

found the Rock Island to be cashless on September 26, 1979, and or-

dered the Kansas City Terminal Railway Company (“KCT’’) to provide

directed service over the Rock Island routes. Directed Service Order No.

1398, Kansas City Terminal Ry.—Directed to Operate Over—Chicago,

R. 1. & P., 360 1.C.C. 289 (1979). This directed service was in effect at

the time of the order appealed in the case at bar.

KCT’s directed service ended on March 23, 1980. Following KCT’s

directed service operations, other rail carriers provided rail service over

the Rock Island’s lines through May 31, 1980, pursuant to ICC directed

service orders. On May 30, 1980, the President signed the Rock Island

Railroad Transition and Employee Assistance Act (the “Rock Island

Act”), P.L. 96-254, 94 Stat. 339 (1980). The Rock Island Act provides

for the continuation of directed service pending sales of the Rock Is-

land’s freight lines to other interested rail carriers and its Chicago-Joliet

commuter line to the Regional Transportation Authority.

a-4

Rule 8-303‘ to retain the Plan for not less than thirty days; during

that time the court would review the plan in the context of a study

by Peat, Marwick & Mitchell, a court appointed independent

consultant, and would consider modifications, alternative plans,

and comments; the informational copy of the plan filed with the

ICC did not constitute an official filing with the ICC; and the

court would “formally transmit the Plan of Reorganization,

modifications to it, and alternative plans, in accordance with

Bankruptcy Rule 8-303, with whatever comments it may have, to

the Commission for their action, pursuant to Bankruptcy Rule

8-303, with instructions to the Commission that the Commission

should consider the Plan at that time.”

On January 21, 1980, Peat, Marwick, Mitchell & Co. filed its

report, in which it concluded that the core operation proposed by

the Trustee in the Plan was not viable. At a status hearing on Jan-

uary 25, 1980, the Creditors and the Federal Railroad Adminis-

tration argued that since the independent consultant had conclud-

ed that the Trustee’s Plan was not feasible, the court should direct

the Trustee to withdraw the Plan and to file a new plan which

would provide for the total liquidation of the estate. The Creditors

argued that the court would simply be wasting everyone’s time in

transmitting the Plan, or any reorganization plan, to the ICC. At

that time, the Trustee argued that the Plan should be forwarded

to the ICC for evaluation of the reorganizability of the core.

After listening to the arguments of counsel who were present at

that status conference,’ the court concluded that the consultant’s

“Bankruptcy Rule 8-303 provides:

Not less than 30 days after the first filing of a plan under Rule

8-301, the court shall transmit all plans and modifications which

have been filed with it to the Interstate Commerce Commission for

filing with and consideration by the Commission.

*The ICC did not appear at the hearing of January 25, 1980, although

the ICC had been active in the proceedings to that date. At the January

25 hearing, John Broadley of the United States Department of Justice,

representing the Federal Railroad Administration, stated:

(Footnote continued on following page)

a-5

report “is a good study and I am compelled to accept its conclu-

sions.” Tr. 97. The court continued:

This being so I am compelled also, if logic prevails, to accept

the conclusion that the plan of reorganization proposed by

the Trustee has no hope of success.

The Trustee is therefore instructed not to forward the plan

of reorganization to the Commission. The Trustee is in-

structed to continue his present plans for cessation of opera-

tions by the time of the anticipated termination of the direct-

ed service order with the hope that that might be extended,

and the Trustee is instructed to prepare and file with the

Court a preliminary plan of liquidation. .. .

Tr. at 97. The court’s minute order of January 25, 1980 granted

the Creditors’ motion that the court decline to forward the Plan to

the ICC and directed the Trustee to begin preparation of a plan of

liquidation.

On February 19, 1980, the RLEA filed comments on the

court’s January 25 order. The court ordered that it would treat

the comments as a motion for reconsideration. On February 27,

1980, the court denied the RLEA’s motion to reconsider. The

RLEA appeals from both the order of January 25, 1980 and the

denial of reconsideration.

(Footnote continued from previous page)

In connection with preparing a propesed order I had a discussion

with Mr. Rush yesterday about the position the Commission would

likely take if your Honor entered an order directing the Trustee to

withdraw this plan. Mr. Rush indicated that if your Honor entered

such an order the Commission, in all likelihood, would not find it

expedient, necessary or proper to appeal that decision on jurisdic-

tional grounds. And the Commission has frequently expressed con-

cern about the exercise of its primary jurisdiction. Mr. Rush’s in-

dication to me was that if your Honor finds that the plan has no

merit and decides that you should order the Trustee to withdraw it,

that the Commission would acquiesce in that decision.

Tr. at 56-57. Mr. Broadley joined the creditors in seeking to have the

plan of reorganization withdrawn.

a-6

Before proceeding to the legal arguments, we briefly recount

the history of the Rock Island since February, 1980. On March

19, 1980, the court entered Order No. 229, which required the

Trustee to file a plan of reorganization by July 17, 1980, encom-

passing the liquidation of the assets of the debtor. On April 14,

1980, the court entered Order No. 232, which directed the Trus-

tee to file an application with the ICC “for its report confirming

the abandonment of the Rock Island’s total railroad system sub-

ject to sale of portions of such system to other entities for their

operation thereof.’”

The ICC filed its report in response to the Trustee’s application

for system-wide abandonment on May 23, 1980. Docket No.

AB-46 (Sub.-No. 22). The ICC concluded that “abandonment of

the Rock Island and its dissolution as an operating railroad is

required by the public convenience and necessity.” Docket No.

AB-46 (Sub.-No. 22) at 3. The ICC denied the RLEA’s motion to

reject the abandonment application. /d. at 5-6.

On June 2, 1980, the reorganization court held hearings con-

cerning the proposed abandonment and ordered total system-

wide abandonment of the Rock Island’s lines and discontinuance

of its service.

The Trustee already has taken various steps toward liquidating

the Rock Island. On June 16, 1980, the RLEA moved for a stay of

liquidation, detailing the progress of the liquidation as follows:

Rolling stock leases have been assigned or terminated while

other operating equipment has been sold. On May 5, 1980,

the District Court entered Order No. 234 granting the Trus-

tee blanket authority to liquidate real and personal assets

‘Section 17(a) of the Milwaukee Road Restructuring Act

(“MRRA”), Pub. L. No. 96-101, 93 Stat. 736 (1979), transferred ul-

timate jurisdiction over abandonments from the ICC to the reorganiza-

tion court for cases pending under Section 77 of the Bankruptcy Act.

Section 17(a) of the MRRA mrovides that the court may authorize

abandonments pursuant to 1; £'.S.C. §1170.

a-7

and accounts under $100,000.00 in value. Real property,

such as track rights of ways, has been sold. See, Docket Sheet

Page 194-95. Also, an independent consultant has been

retained by the estate to expeditiously liquidate the real

property of the estate. Order dated May 28, 1980.

RLEA Motion to Stay at 5. On November 21, 1980, this court or-

dered that the RLEA’s motion to stay further acts of liquidation

pending appeal would be taken with the case at the time of its dis-

position.

On December 20, 1980 the RLEA filed with this court its

“Emergency Renewal of Motion by Railway Labor Executives’

Association to Stay All Further Acts of Liquidation Pending Ap-

peal.”’ The ““Renewed Motion” was prompted by the Trustee’s an-

nouncement of his intention to sell the Silvis, Illinois, facility and

214 locomotives to the Varlen Corporation. The RLEA argued

that:

[t]his single sale will surely decrease the already slim

chances for reorganizing the Rock Island, for any resump-

tion of rail operations over the core structure would en-

counter severe difficulties in resuming operations without

sufficient engines and a major repair facility.

RLEA Renewed Motion at 4.

On December 24, 1980 we entered the following order:

IT IS ORDERED that the renewed motion is DENIED to

the extent that it seeks a stay of the sale of the properties

mentioned in the intervenor-appellant’s renewed met‘on. In-

tervenor-appellant has failed to satisfy all of th. equire-

ments for a grant of stay pending appeal. We cannot con-

clude at this point in our deliberations that the intervenor-

appellant shall prevail on the merits of this appeal.

The intervenor-appellant’s motion of June 16, 1980, seek-

ing a general stay pending appeal in this case, shall be re-

solved at a later date by the merits panel.

a-8

We now reach the merits and conclude that the district court

acted within its authority in refusing to transmit the Trustee's

plan of reorganization to the ICC and in ordering the Trustee to

commence liquidation of the Rock Islaud.

Section 77(d) of the Bankruptcy Act, 11 U.S.C. § 205(d), deals

with the filing of a plan of reorganization in a railroad reorganiza-

tion. Th. RLEA argues that the ICC is to play the major role in

reorganizing a debtor under Section 77, and that Bankruptcy

Rule 8-303 cannot enlarge the jurisdiction of the court to examine

the merits of a plan prior to transmittal to the ICC pursuant to

Rule 8-303.

First, the RLEA argues that the ICC has the primary respon-

sibility for formulating a reorganization plan and that, therefore,

the reorganization court should not have rejected the Pian before

the ICC had a chance to consider it. The RLEA finds support for

its argument in Ecker v. Western Pac. RR. Corp., 318 U.S. 448

(1943), where the Supreme Court stated:

When examined to learn the purpose of its enactment, § 77

manifests the intention of Congress to place reorganization

under the leadership of the Commission, subject to a decree

of participation by the court.

318 U.S. at 468. But, while recognizing the importance of the ex-

pertise of the ICC, the Supreme Court also recognized the power

of the reorganization court to find that a debtor is unreorganiz-

able. The Supreme Court acknowledged that the reorganization

court can veto a reorganization plan in its entirety after certifica-

tion of the plan by the ICC. 318 U.S. at 474. See Section 77(e), 11

U.S.C. § 205(e).

The RLEA’s reliance on Ecker to establish that the reorganiza-

tion court should defer to ICC findings is misplaced. In Ecker, the

Court affirmed the district court’s approval, pursuant to Section

a-9

77(e), of a plan of reorganization certified by the ICC. The Court

reversed the Ninth Circuit's finding that the district court should

have exercised its independent judgment with respect to subjects

such as valuation. A reorganization court’s acceptance of ICC

findings in proceedings pursuant to Section 77(e) simply is not

relevant to the question of whether the reorganization court can

order the Trustee to withdraw a proposed plan before submission

to the ICC. Ecker dealt with the reorganization court's scope of

review of a plan after certification by the ICC, not with a proposed

plan submitted to the court by the Trustee.

Furthermore, in the more recent New Haven Inclusion Cases,

399 U.S. 392, 431-34 (1970), the Supreme Court emphasized the

important, indeed dominant, role of the reorganization court in

Section 77 proceedings. In that case, as in Ecker, the issue was the

reorganization court’s scope of review of ICC findings pursuant to

Section 77(e). The Court stated:

The statutory authority to appoint special masters and hold

evidentiary hearings reflects the unique powers possessed by

the reorganization court in passing upon the Commission's

proposed plan of reorganization.

In the reorganization court reposes ultimate responsibility

for determining that the plan presented to it by the Commis-

sion satisfies the “fair and equitable” requirement of § 77.

399 U.S. at 434. Without deciding to what degree New Haven In-

clusion Cases erodes Ecker’s deference to ICC expertise in Sec-

tion 77(e) proceedings,’ we find that the balance of power between

the reorganization court and the ICC in Section 77(d) proceed-

ings does not require the reorganization court to seek ICC con-

sideration of a proposed reorganization plan when the court has

found that the plan has no chance of success.

"In his dissent, Justice Black complained of the majority's departure

from Ecker. 399 U.S. at 499.

a-10

Next, the RLEA argues that the structure of Section 77(d) and

Rule 8-303 show that the court’s role with respect to the Trustee’s

plan is purely ministerial. The RLEA claims that the purpose of

allowing the court to retain a plan for not less than 30 days is only

for the sake of achieving efficiency by assuring that “all propo-

nents of plans have filed their plans prior to transmission of the

first filed plan to the Commission.” Rule 8-303, Advisory Com-

mittee Note. We disagree. The ordinary outcome under Rule 8-

303 will be that the court will transmit a plan to the ICC. But we

cannot say that the court has no discretion whatsoever to aid in

the efficient management contemplated by Rule 8-303 by refus-

ing to transmit a manifestly unfeasible plan to the ICC.

Shortly after the Trustee’s Plan was submitted, but before it

was evaluated in light of the Peat, Marwick study, the reorgani-

zation court reflected on the purposes of Rule 8-303:

Those purposes are obviously a preliminary review by the

Court, of the proposal of alternative plans, and in the par-

ticular instances of this case an opportunity for the Court

and the creditors and the Railroad, and the Government, to

view this plan in the context of the Peat, Marwick evaluation

of it. And under any ordinary circumstance that would not

only be the ordinary course of the case but the wise course of

the case. I think the thirty days is therefore a purpose. I

recognize that the Court had very little discretion in this

matter in terms of what it might do with the plan. It is con-

ceivable to me, although I doubt that it will be applicable in

this case, that the plan presenied be one either by reading on

its face or in the light of the Peat, Marwick evaluation, be

one so completely without merit that the Court will not for-

ward it to the Commission and order the preparation of

another one, something more sensible.

Tr. of January 2, 1980 at 31-32. The court recognized that its dis-

cretion not to submit the plan to the ICC was limited to a situa-

tion that the court doubted would occur—that the plan was with-

out merit in light of the Peat, Marwick study. But that situation

a-11

did occur, and the court properly exercised its discretion not to

transmit the plan.

The court’s action did not circumvent [CC involvement in either

the reorganization or liquidation process. The court did not simply

withhold the Plan from the ICC and commence reorganization

without ICC input. Rather, the court ordered the Trustee to

prepare a new plan aimed at liquidation. In fact, the court stated

that the January 25, 1980 decision not to transmit the plan to the

ICC “starts now rather than later the process of private sale and

Commerce Commission reorganization of railroad service... .”

Tr. of January 25, 1980 at 98.

The ICC has not challenged the reorganization court’s actions.

At the hearing before the January 25 ruling, the government rep-

resentative present informed the court that “[ICC counsel’s] in-

dication to me was that if your Honor finds that the plan has no

merit and decides that you should order the Trustee to withdraw

it, that the Commission would acquiesce in that decision.” Tr. of

January 25, 1980 at 56-57. In addition, the ICC’s May 23, 1980

report recommending abandonment supports the court’s view.

The ICC states that

[w]e have reviewed the carrier’s present financial position

and future prospects and conclude that it has no realistic

hope for reorganization or continued service in its present

form. The extremely deteriorated condition of its plant and

severe erosion of its traffic base (through interrupted and un-

certain operations) make it clear that the Rock Island will

not be able to recover. Consequently, fairness to its creditors

and stockholders dictates that the carrier be liquidated.

Docket No. AB-46 (Sub.-No. 22) at 3-4.

In light of the ICC’s deference to the reorganization court's

view of the Trustee’s plan, as well as that court’s great familiarity

with the Rock Island through five years of reorganization

proceedings, it is inaccurate for the RLEA to argue that the court

a-12

simply “substituted its judgment for that of the Commission.”

Reply Br. at 7. The court’s decision must be viewed in the context

of the entire history of the Rock Island. Judge McGarr stated in

his January 25, 1980, ruling:

I have listened to the Trustee for years through his counsel

argue that I authorize and continue to be patient with the at-

tempts to bring about a cash-based reorganization, based

upon my finding of reorganizability. Mr. Manos argues in an

abundance of emotion today that I should not decide that is-

sue in four hours. I have in fact thought of very little else for

four years. It has been the basic issue that I have confronted

and the issue which I have had to decide over and over again

as circumstances changed.

Tr. of January 25, 1980 at 95. Therefore, we hold that Judge

McGarr’s decision not to transmit the Trustee’s plan to the ICC

violated neither Section 77(d) of the Bankruptcy Act nor Bank-

ruptcy Rule 8-303.

The RLEA argues that, in addition to not having jurisdiction to

decide that the Trustee’s plan was without merit, the reorganiza-

tion court did not have the jurisdiction to order the Trustee to

liquidate the Rock Island. The RLEA claims that Section 1174 of

the Bankruptcy Reform Act of 1978, 11 U.S.C. § 1174, for the

first time permitted railroad reorganization courts to direct and

control liquidations, and that Section 77 of the Bankruptcy Act,

which applies to this case,” contains no authority for liquidation.

Thus, the RLEA argues that the court may dismiss the petition

for undue delay in reorganization, pursuant to Section 77(g) and

Bankruptcy Rule 8-310, but it may not unilaterally determine

that the debtor is unreorganizable and order liquidation.

“According to § 403 of the Bankruptcy Reform Act, some provisions

of the new Bankruptcy Code are applicable to Section 77 cases pending

before its enactment. But, Section 1174 is not one of those sections

which applies to cases commenced under the Bankruptcy Act. Pub. L.

No. 95-598, 92 Stat. 2683 (1978).

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According to the RLEA’s interpretation of Section 77, the

reorganization court must either dismiss the petition for reorga-

nization or continue reorganization. The RLEA does not acknowl-

edge the possibility that liquidation may be the end result of a

Section 77 reorganization. But the RLEA’s view ignores the fact

that it is difficult to mark the point at which an attempt to reor-

ganize becomes a liquidation. It would be absurd to hold that the

reorganization court may supervise liquidation of all but a small

core railroad, yet cannot supervise the liquidation of much of the

same property once the concept of a viable core has been rejected.

Sectior 77 does not set any limit on what portion, if any, of the

debtor must be preserved pursuant to Section 77 proceedings.

Section 77(b), 11 U.S.C. § 205(b) states:

(b) A plan of reorganization within the meaning of this

section ... (5) shall provide adequate means for the execu-

tion of the plan, which may include. . . the sale of all or any

part of the property of the debtor. .. .

(emphasis added). In New Haven Inclusion Cases, the Supreme

Court discussed the reorganization court’s power to sell the assets

of the New York, New Haven & Hartford Railroad (“New

Haven’’) pursuant to § 77(b)(5). After noting that the reorgani-

zation court and trustees were “charged with the dual respon-

sibility of conserving the debtor’s estate for the benefit of credi-

tors and preserving an ongoing railroad in the public interest,”

399 U.S. at 420, the Court stated:

The provisions of § 77 “doubtless suffice[d] to confer upon

the [reorganization court] power appropriate for adjusting

property rights in the railroad debtor’s estate and, as to such

rights, beyond that in ordinary bankruptcy proceedings.”

Id., at 85-86; cf. 5 Collier, supra, § 77.11, at 498-499.

Together, the court and the Commission “unquestionably”

had “full and complete power not only over the debtor and its

property, but also, as a corollary, over any rights that

[might] be asserted against it.” Callaway v. Benton, 336

U.S. 132, 147. One such power was precisely that which the

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Commission was about to propose that the reorganization

court exercise—the power to confirm a plan of reorganiza-

tion providing for “the sale of all... of the property of the

debtor....”" Bankruptcy Act, § 77(b)(5), 11 U.S.C.

§ 205(b)(5).

399 U.S. at 421 (footnote omitted). See also Matter of Lehigh

Valley R.R. Co., 558 F.2d 137, 141-47 (3rd Cir. 1977) and cases

cited therein.’ These cases indicate that each railroad in reorga-

nization under Section 77 must be handled according to the

unique circumstances of that debtor, and liquidation may be an

appropriate option.

The RLEA does not seriously urge dismissal of this action and

resort to equity receiverships for liquidation," but it does argue

that an equity receivership is the only way that the creditors of the

"In Lehigh Valley, the Third Circuit stated that “these cases provide

persuasive support for the proposition that the reorganization of a

railroad may properly continue under Section 77 despite the fact that

the enterprise is no longer capable of being reorganized into a working

railroad.’ 558 F.2d at 146. The court concluded that the reorganization

court had jurisdiction “to reorganize or liquidate the enterprise

pursuant to § 77, or pursuant to any other provisions of the Bankruptcy

Act, if the court finds that such action would be in the best interests of

the debtor’s estate.” 558 F.2d at 146-47.

The RLEA argues that the Lehigh Valley reorganization court’s

authority to liquidate under Section 77 comes from § 618(b) of the

Railroad Revitalization and Regulatory Reform Act of 1976, which

added § 601(b)(4), 45 U.S.C. § 791, to the Regional Raii Reorganiza-

tion Act of 1973 (“Rail Act”), Pub. L. 93-236, 45 U.S.C. §§ 743, 744.

But Lehigh and the cases discussed therein actually stand for the

opposite result: the amendment authorized the continuation of Section

77 proceedings despite the special provisions in the Rail Act which

transferred working railroad property to Conrail. 558 F.2d at 141-42.

“One of the reasons for enactment of Section 77 was to avoid equity

receiverships for railroads. As stated in New Haven Inclusion Cases:

Congress enacted [Section 77] in part “to prevent the notorious

evils and abuses of consent receiverships,"" New England Coal &

Coke Co. v. Rutland R. Co., 143 F.2d at 184, of which one of the

more egregious was the requirement of an ancillary filing and order

of appointment in the federal court for every district in which the

debtor had property.

399 U.S. at 426-27.

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Rock Island may withdraw their assets from public use at this

time. The RLEA claims that since the creditors have enjoyed the

benefits of having a single resolution of all claims, rather than

many receiverships, they should bear the burden of serving the

public interest by keeping their property invested in rail service.

But the history of this case indicates that the reorganization court

has duly considered the public interest throughout the reorga-

nization proceedings and has determined that continued opera-

tion of the Rock Island no longer serves the public interest. Thus,

the liquidation order does not violate the public interest consider-

ations required by Section 77.

In summary, the reorganization court had the jurisdiction

under Section 77 to decline to accept the Trustee’s Plan and to

order the Trustee to formulate a plan of liquidation. Further-

more, the reorganization court properly exercised its discretion in

exercising that jurisdiction. Because of our holding on the merits,

it is unnecessary to reach the Creditors’ argument that this case is

moot.

The order appealed from is

AFFIRMED.

APPENDIX B

EXCERPTS FROM ORDER NO. 248

JUNE 2, 1980

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

In the Matter of

In Proceedings for the

CuicaGo, ROCK ISLAND AND Reorganization of a

PACIFIC RAILROAD COMPANY, Railroad

Debtor. No. 75 B 2697

Order No. 248

This cause coming on as the hearing heretofore set by this

Court by its Order No. 232 entered April 14, 1980, upon the Mo-

tion filed by William M. Gibbons, the Trustee herein and by the

Indenture Trustees and the Henry Crown et al. intervenor inter-

ests and upon the direction of this Court to the said Trustee herein

to file an application with the Interstate Commerce Commission

for its report confirming the abandonment of the Debtor's (“Rock

Island”) total railroad system, the said application to be filed as

described in Section 17 of the Milwaukee Railroad Restructuring

Act (MRRA) and Section 1170 of the Bankruptcy Code, and

It appearing to the Court that the Interstate Commerce Com-

mission has filed its report dated May 23, 1980 containing its ad-

visory recommendations as prescribed under Section 17 of the

MRRA as aforesaid and recommending total system discontin-

uance of service and abandonment, subject only to service contin-

uity by other carriers at certain defined points and segments

b-2

pending possible transfer or sale to such carrier or other entities

who may desire to continue such rail service, and

* * *

The Court having found that Rock Island’s unconditional dis-

continuance of service and its total system abandonment is consti-

tutionally mandated and having further found that to force a rail-

road to continue operations indefinitely at a loss in order that the

public may be served is a violation of the Fifth Amendment rights

of those who have a security interest in the enterprise. Brooks-

Scanlon Co. v. Railroad Commission, 251 U.S. 396 (1920); and

The Court having further found that labor protective condi-

tions or arrangements are not required of Rock Island’s estate

pursuant to Section 17 of the MRRA by reason of Rock Island's

systemwide termination of operations and total line abandonment

which do not warrant further consumption of Rock Island's assets

for protection payments to employees whose jobs with Rock Is-

land are no longer in existence by reason of such total abandon-

ment and operational discontinuance. Montpelier & Barre Rail-

road Co, Abandonment (Dkt. No. AB-202F) Lot

(1980); Northampton & Bath Railroad Co. Abandonment, 354

L.C.C. 784 (1978); Wellsville, Addison & Galeton Railroad

Corp. Abandonment, 354 1.C.C. 744 (1978); Tennessee Central

Railway Co. Abandonment, 333 1.C.C. 443 (1968); Okmulgee

Northern Railway Co. Abandonment, 320 1.C.C. 637 (1964);

Rutland Railway Corp. Abandonment, 317 1.C.C. 393 (1962),

aff'd sub nom. Brotherhood of Locomotive Engineers v. United

States, 217 F. Supp. 98 (N.D. Ohio 1963); Chicago, Attica &

Southern Railroad Co. Abandonment, 261 1.C.C. 646 (1946),

and, that consistent with ICC precedent, with the Rock Island's

constitutional right to abandon its lines and discontinue its ser-

vice, and with the equities of the Rock Island situation, no labor

protection arrangements may be imposed on the Rock Island

estate; and

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The Court being fully advised in the premises,

NOW THEREFORE IT IS HEREBY ORDERED, AD-

JUDGED AND DECREED AS FOLLOWS:

1. That the total systems abandonment of Rock Island’s lines

and the discontinuance of all of its rail services and obligations

as a common carrier is hereby confirmed and decreed, such

abandonment to be consistent, however, with the recommen-

dations of the Interstate Commerce Commission pertaining to

the transfer, sale or disposition of track and trackage rights as

contained in the report of the Commission dated May 23,

1980; provided, however, that the reasonable period within

which the Trustee shall retain the lines designated in Appen-

dix D to the ICC Report shall not exceed 180 days from the

date of this Order. That in entering this order, the Court is

cognizant that a further order may be required with respect to

passenger commuter service pursuant to Section 120 of the

Rock Island Transition and Employee Assistance Act.

2. That no claim or arrangeinent of any kind or nature for em-

ployee labor protection payable out of the assets of the Debt-

or’s estate is allowed or required by this Court pursuant to

Section 17 of the Milwaukee Railroad Restructuring Act and

the Trustee is hereby directed not to pay any such claim or to

borrow for such purpose, any and all such claims or arrange-

ments being hereby denied and prohibited by the Court.

Enter

Dated June 2, 1980

/ss/ Frank J. McGarr pr

U.S. District Judge

APPENDIX C

PARENT COMPANIES, SUBSIDIARIES AND AFFILIATES

The appellees in this case are William M. Gibbons, in his

capacity as Trustee of the Chicago, Rock Island and Pacific Rail-

road Company, The First National Bank of Chicago and Con-

tinental Illinois National Bank and Trust Company of Chicago,

in their capacities as Indenture Trustees, and Henry Crown et al.,

substantial holders of first mortgage bonds, income debentures

and common stock of the Rock Island. Parent companies, sub-

sidiaries and affiliates of the appellees are as follows:

A. William M. Gibbons, in his capacity as Trustee of the

Chicago, Rock Island and Pacific Railroad Company

Affiliates

A&M Ry. Bridge & Terminal Co.

The Belt Ry. Co. of Chicago

Calumet Western Ry. Co.

Denver Union Terminal Ry. Co.

Galveston Terminal Ry. Co.

Great Southwest R. R., Inc.

Houston Belt & Terminal Ry. Co.

Illinois Terminal R. R. Co.

lowa Transfer Ry. Co.

Joliet Union Depot Co.

Keokuk Union Depot Co.

The Minnesota Transfer Ry. Co.

Oklahoma City Jct. Ry. Co.

Peoria & Bureau Valley R. R. Co.

Peoria Ry. Terminal Co.

Peoria Terminal Company

Pullman Railroad Company

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Subsidiaries

Continental International Finance Corporation

Continental Bank Internationa! (Texas)

Continental Bank International (Pacific)

Continental Bank International

Conill Bank A.G.

Continental Bank S.A./N.V.

Continental Illinois Bank (Switzerland)

Continental Development Bank, S.A.L.

Underwriters Bank (Overseas) Limited

Continental Illinois Thailand Ltd.

Affiliates

Continental Illinois Leasing Corporation

Continental Illinois Equity Corporation

Continental Illinois Venture Corporation

Republic Realty Mortgage Corporation

Continental Illinois (Canada) Ltd.

Continental Illinois Investment Advisory

Continental Illinois Limited

Continental Illinois International Investment

D. Henry Crown, et al., include the Arie and Ida Crown

Memorial, an Illinois not-for-profit corporation, which has

no parent, subsidiaries or affiliates.