Petition for Writ of Certiorari — Great Northern Railway Co. v. Pullman Co.

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Supreme Coert, U. &

FILED

JUL 2 1975

MICHAEL RODAK, JR..CLERI

IN THE

Supreme Court of the United States

OCTOBER TERM, 1974.

No. Y5- 7 ;

THE GREAT NORTHERN RAILWAY COMPANY anp

THE NORTHERN PACIFIC RAILWAY COMPANY,

CORPORATIONS,

Petitioners,

vs.

THE PULLMAN COMPANY, A CORPORATION,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT.

JOHN H. BisHop,

135 South LaSalle Street,

Chicago, Illinois 60603,

Attorney for Petitioners.

Of Counsel:

JAMES J. FLYNN,

One IBM Plaza,

Chicago, Illinois 60611.

Gunthorp-Warren Printing Company, Chicago e Financial 6-6565

erases ——_

INDEX.

PAGE

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Reason for Granting the Writ ...................... 16

The decision of the Court of Appeals violates the

mandate of Rule 52(a) of the Federal Rules of

Civil Procedure that findings of fact shall not be set

aside unless clearly erroneous and decisions of this

SY SOE SH GIN as vc wk can GON Cade cee ek 16

Prayer for Writ of Certiorari .................00005. 25

Appendix:

Opinion of the Court of Appeals ................ Al

Opinion of the District Court ................4.. Al8

List OF AUTHORITIES.

Cases.

Graver Tank & Mfg. Co. v. Linde Air Products Co., 339

EEE Wine ney hk aoe tie ees pase 22

Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U. S.

Se SD 0c cue e a a ale ba een Eee aed 21

Rule.

IN THE

Supreme Court of the Gnited States

OcToBER TERM, 1974.

THE GREAT NORTHERN RAILWAY COMPANY anp

THE NORTHERN PACIFIC RAILWAY COMPANY,

CORPORATIONS,

Petitioners,

vs.

THE PULLMAN COMPANY, a CORPORATION,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT.

Petitioners pray that a writ of certiorari issue to the United

States Court of Appeals for the Seventh Circuit to review the

judgment of that Court entered on April 17, 1975. That judg-

ment reversed a judgment entered by Judge McLaren of the

District Court for the Northern District of Illinois. Chief Judge

Fairchild dissented from the judgment of the Court of Appeals.

Bi! EED THROUGH

PEE POP ERE IN ROR OE TD es ae Om

OPINION BELOW.

The opinion which incorporates the findings of the District

Court was not reported. It is contained in the Appendix hereto.

The opinion of the Court of Appeals for the Seventh Circuit is

not yet reported in the Federal Reporter. It is incorporated in

the Appendix hereto.

JURISDICTION.

The judgment of the Court of Appeals for the Seventh Circuit

sought to be reviewed was entered on April 17, 1975. A timely

Petition for Rehearing was denied on May 21, 1975.

The jurisdiction of this Court is invoked under 28 U. S. C.

§ 1254(1).

QUESTION PRESENTED FOR REVIEW.

In this case, the District Court held that, under a contract

known as the Uniform Service Contract between Respondent

Pullman and the Petitioners, Pullman was only entitled to re-

imbursement from Petitioners for separation payments made to

its employees if such payments constituted “operating expenses”

to Pullman as that term is defined and applied in accounting. The

District Court further found that separation payments by Pull-

man to its employees, which were occasioned by the cessation

of Pullman’s operations, or its non-operations, were not “operat-

ing expenses” as that term was used in the Uniform Service Con-

tract and is employed in accounting, and hence were not reim-

bursable to Pullman.

In reviewing the judgment and findings of the District Court

sitting without a jury, can a Court of Appeals set such findings

aside where they were based upon (1) expert accounting evi-

dence and (2) the undisputed accounting practices of Pullman

with respect to analogous accounting questions, without a show-

ing, or even an assertion, that such findings were clearly errone-

ous as is required under the provisions of Rule 52(a) of the

Federal Rules of Civil Procedure?

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NAR RAINE NIN HT TI A OP OIE: MERTEN

STATEMENT OF THE CASE.

In 1949, Respondent, The Pullman Company, executed the

Uniform Service Contract (“USC”) with virtually all of the

railroads in the United States which then offered sleeping car

service. That contract required each of the railroads to reim-

burse Pullman to the extent Pullman’s “operating expenses”,

“rental for cars”, and “taxes” exceeded its “operating revenues”

in conducting sleeping car service.

In 1968 and 1969, those railroads which still remained parties

to the contract withdrew from it as they had the right to do.

Pullman then terminated all of its business and operations.

This cessation, and Pullman’s anticipation of it, resulted in the

termination by Pullman of all of its employees. Most of those

employees were paid a separation allowance. These payments

totaled $14.9 million. Pullman classified these separation pay-

ments as “operating expenses” under the USC and then billed

the rai?*oads to recover the amounts so paid. Petitioners Great

Northe:. «nd Northern Pacific contested such billings on the

ground that the payments were costs attributable to the cessation

of Pdjiman operations and hence not operating expenses. Peti-

tioners-were sued for such unpaid billings. The petitioners denied

liabilixy and counterclaimed for the recovery of amounts paid to

Pullman for separation allowances. District Judge McLaren

found for the petitioners, holding that certain separation pay-

ments were not reimbursable operating expenses under the USC.

A statement of the facts underlying the District Court’s holding

follows. *

* Record references are employed herein as follows: “A” means

the printed appendix in the Court of Appeals for Great Northern

and Northern Pacific; “PX” means Plaintiff's exhibit; “DX” means

Defendants’ exhibit; “Cert. App.” means the appendix to this petition.

syewnrs: Qe ee cE NRIOL POLIS REIT HG STONE ORE ERI YORE EE PERMITE

PAE ER 9 ‘ i

The Purchase of Pullman Capital Stock by the Railroads and

the Uniform Operating Contract.

The United States, in 1940, filed suit under the Sherman Act

against Pullman, Inc. and its wholly owned subsidiaries Pull-

man-Standard, a manufacturer of sleeping cars, and Pullman,

which furnished, manned, and serviced sleeping cars. The Court

found that all three defendants had engaged in a monopoly in

violation of the Sherman Act. United States v. Pullman, 50 F.

Supp. 123, 132-134 (E. D. Pa., 1943). In May, 1944 a decree

was entered requiring Pullman, Inc. to divest itself either of

Pullman-Standard or Pullman (A. 114-116). Pullman, Inc.,

elected to divest itself of Pullman, and it proposed to sell to the

railroads its capital stock and the sleeping car business.

While the order of the District Court approving the proposed

sale (64 F. Supp. 108) was being appealed to the Supreme

Court, the buying group of railroads submitted a proposed

operating contract, which was designated “Uniform Operating

Contract” (“UOC”), to the Interstate Commerce Commis-

sion to obtain approval of its as a “pooling agreement”.* After

the Supreme Court affirmed the decree approving the sale (330

U. S. 806), the ICC approved the UOC, finding that each of

the 59 railroads had assented to its terms (268 I. C. C. 473).

On June 30, 1947, Pullman’s capital stock was sold to the

59 railroads who purchased that percentage of stock which was

equivalent to their percentage of use of Pullman service during

the year 1940 (A. 118).

The UOC specified the method of accounting between Pull-

man and each of the railroads with respect to revenues and ex-

penses of operation. It provided that Pullman should retain from

its “gross earnings” in each contract year the total of its expenses

of operation plus an interest return on Pullman’s investment in

cars operated. It further provided that if earnings exceeded ex-

* The complete text of the Uniform Operating Contract appears

at pp. 1-22 of Pullman’s Appendix in the Court of Appeals.

penses of operation and interest, the overage would be divided

equally between Pullman and the railroad, but that if expenses of

operation and interest exceeded earnings, then the railroad would

pay to Pullman the amount of the deficiency. The term “ex-

penses of operation” was define¢ to include “all of Pullman's

expenses of conducting its sleeping car business, except the cost

of maintaining and operating air conditioning apparatus. . . .”

Emphasis supplied. (A. 118-119.)

In early 1949, a new contract, known as the Uniform Service

Contract (“USC”), was submitted to the ICC for its approval.

The Commission approved the USC, and it became effective

July 1, 1949 (276 I. C. C. 5). The USC, as amended, provided

that for each year “Pullman shall furnish a statement . . . of

revenues, expenses, and a 3% return on Pullman’s investment

. . ., in accordance with Appendix A attached to and made a part

of this contract.” It required that: “If for any Contract Year the

expenses allocated to the Railroad plus a 3% return on Pullman’s

investment . . . shall exceed the revenues allocated to the Rail-

road, the Railroad shall pay to Pullman the amount of the

deficiency.”

Appendix A to the USC provided that:

“Expenses to be accounted for under this contract shall

include the following:

(A) Operating Expenses

(B) Taxes other than Federal Taxes on Income

After providing for the segregation of actual expenses into 10

cost groups, the appendix required that:

“({E]ach of [such] groups shall include direct and indirect

expenses pertaining thereto, . . . as provided for in Pull-

man’s ‘Classification of Accounts’ as prescribed by the

Interstate Commerce Commission.” (Pullman’s App. 34-

35, 79-80).

Under the USC each railroad had the right, upon the giving

of 6 months notice, to completely withdraw from and cancel

GONE AGS ETRE P T OL LL IEIEEE DOLE i ENN IOE BOE IT PE II IE LE PLING EOE EEE —_—

the contract. Railroads also had the right to withdraw partially,

or take over from Pullman the actual operation of the cars while

leaving the maintenance and shopping of cars with Pullman.

Reduction in USC Operations and Job Protection Demands

by Pullman Unions.

In the 1950's, as the public turned from railroad service to

other modes of intercity transportation, Pullman’s operations

under the USC were reduced. That reduction of Pullman opera-

tions, magnified by the determination of many of the railroads

to go out of the passenger business, was to continue without

interruption (A. 11-12, 120, PX 3). As a consequence, a sub-

stantial disparity arose between the percentage of stock owner-

ship of many of the railroads and their respective percentage of

use of Pullman service. After 1958 the New York Central, which

in the 1940's had accounted for approximately 15% of use and

accordingly owned 15% of the capital stock of Pullman, no

longer accounted for any material use of service (PX 3).

The reduction in service, and withdrawals from Pullman

operations by the New York Central and others, resulted in

the termination from employment of large numbers of Pullman

employees (A. 12, PX 3). These terminations were followed

by union demands on Pullman for job protection.

In 1960, the conductors’ union demanded protection for its

members in the event of terminations of the USC. After the

procedures required by the Railway Labor Act had been ex-

hausted, the conductors authorized a strike to begin on April

12, 1962 (A. 124-125, Stip. Ex. Q). Pullman obtained first

a temporary and then a permanent injunction preventing any

strike (A. 125). That judgment was reversed (316 F. 2d 556),

and the injunction was dissolved in October, 1963; but in the

interim the conductors commenced litigation described hereafter

which effectively prevented for some time further withdrawals

from the USC.

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Shortly after the conductors’ strike had been enjoined, the

Pennsylvania notified Pullman that effective October 1, 1962

it would “partially withdraw” from the USC on its local lines.*

Pennsylvania was then the largest user of sleeping car service,

accounting for more than 15% of Pullman’s operations. In

the sense used by Pennsylvania, and later by other railroads

who did likewise, a partial takeover or withdrawal from the

USC resulted in the railroad assuming the operation of the

sleeping cars while leaving with Pullman the maintenance and

shopping of the cars. Pullman porters, conductors, and some

clerks were adversely affected by partial takeovers, as distin-

guished from complete takeovers which would adverscly affect

not only those classes of employees but also shopcraft workers

and supervisors (A. 126).

After service of Pennsylvania’s notice of partial withdrawal,

the conductors sued Pennsylvania and Pullman. In October,

1962 the District Court for the Northern District of Illinois

enjoined the withdrawal until such time as the ICC would find

that its approval of the USC and the pooling arrangement would

not be violated by the proposed withdrawal (Brogan v. Pennsyl-

vania R. R. Co. et al., 211 F. Supp. 881, N. D. Ill. 1962). The

Commission found in January, 1964 that Pennsylvania's pro-

posed action was contemplated by the USC and not violative of

its order approving the “pooling agreement” (322 I. C. C. 100),

and a three-judge court affirmed the ICC’s finding (263 F. Supp.

650, N. D. Ill. 1966). That judgment was affirmed by the

Supreme Court on June 12, 1967 (388 U. S. 455), leaving.

Pennsylvania, after 5 years of litigation, free to withdraw. The

Pennsylvania withdrawal was accomplished on August 1, 1967;

however, for five years, a moratorium had been effected upon

railroad withdrawals from the Uniform Service Contract (A.

127).

* “Local line” service was sleeping car service conducted on the

lines of one railroad; “joint line” service was the operation of a line

of sleeping cars over the tracks of two or more railroads (Plaintiff's

App. 25-26).

During the period that the right of the Pennsylvania to

withdraw was being litigated, the porters, the conductors, and

the shopcraft unions entered into agreements with the contract

railroads for job protection in the event of railroad with-

drawals from the USC (A. 124-129).

Effects of Pennsylvania’s Withdrawal Activities.

During the five-year period in which Pennsylvania’s much-

litigated notice of withdrawal pended, the operating revenues

of Pullman dropped 50%, the number of cars operated de-

clined 40%, and the number of its employees was reduced by

about 35% (PX 96).

In June, 1967, after the Supreme Court affirmed the right of

Pennsylvania to withdraw, executive employment contracts were

immediately made between Pullman and all of its executives.

Those contracts required Pullman to maintain the executive's

existent salary and, in the event of termination of employment

prior to normal retirement, to pay monthly the difference be-

tween what the executive would have received if he had retired

at normal retirement date and the amount actually received

under the pension plan at the date of termination (A. 60). As

evidenced by the employment contracts, management was then

fearful that Pullman would not continue to exist because of the

Pennsylvania withdrawal and the threat of similar action by

other railroads (A. 456). So were the unions, for in late Au-

gust, 1967, after the Pennsylvania withdrawal had been effected,

the porters’ and clerks’ job protection demands, which had been

dormant for two years, suddenly were renewed. After the

National Mediation Board almost immediately terminated its

participation in these cases, the clerks and porters were in a

position to strike (A. 183-184). However, when Pullman

agreed to consider separation payment agreements for the clerks

and porters and in fact entered into a tentative agreement with

the clerks union, the threatened strikes were averted (A. 184-

186).

GRAS EPRI TN OAS ETE SORES EE EE RTO CSE FLAT TUE PS Rn ee ee |

Pullman appended to the clerks’ agreement the following

stipulation:

“It is understood and agreed that the attached [separation

pay] agreement shall be executed by The Pullman Com-

pany and your organization as scon as The Pullman Com-

pany receives authorization for the billing of these separa-

tion allowances from the railroads involved in sleeping car

operations under the Uniform Service Contract.” Emphasis

supplied. (PX 131, 190, p. 5, A. 185-186).

In considering these proposed agreements, Pullman’s Presi-

dent, George W. Bohannon, and its Director of Labor Rela-

tions, Fred J. Boeckelman, concluded that in order for Pullman

to recoup from the railroads any amounts paid to employees

under them, the approval of the railroads would be necessary

(A. 453-455). Bohannon and Boeckelman considered sub-

mitting an amendment to the Uniform Service Contract to the

railroads, but that course was rejected because they thought such

an amendment could not be obtained (A. 453-454, 460).

Rather than amending the USC, management determined to

first submit the agreements to the Pullman Advisory Committee

and its Accounting Subcommittee* and then to the contract rail-

roads for approval from a majority of them (A. 458). This

course or procedure which was followed by Pullman was not

authorized by the USC or by the order of the ICC approving the

USC. As reported by Pullman, it was the “consensus” of the

Advisory Committee that management should proceed to submit

to the railroads the proposed separation agreement and the

manner of recovery of any costs to be incurred (A. 295-296,

DX 124).

In March through May, 1968, Pullman communicated with

the railroads concerning these agreements. After a majority of

the railroads approved execution, Pullman signed the agreements

* The Pullman Advisory Committee was made up of officials

of some of the railroads. It was purely advisory, and it was without

authority to bind the railroads or to amend the USC. Great Northern

and Northern Pacific were not represented on the Advisory Com-

mittee or any of its subcommittees (A. 136, 461).

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on May 27, 1968 (A. 188-190). Each provided that employees

in active service on November 13, 1967 would, if separated after

that date, be entitled to a separation payment which could

amount to the equivalent of 16 months pay (Stip. Ex. AA, BB).

In April, 1968 Penn Central, formed by merger in February,

notified Pullman it would complete the withdrawal on its local

lines by the takeover of maintenance and shopping (PX 12-

14). At the same time, Penn Central was cajoling the roads

with which it had joint line service to withdraw completely from

the USC, which action would necessitate a comparable with-

drawal by virtually all of the eastern and southern railroads

(A. 266-270, PX 17, DX 218, DX 284-289). These railroads

accounted for 49% of Pullman operations in the first six months

of 1968 (PX 120, pp. 10-11).

In the first 6 months of 1968, Pullman had separated ap-

proximately 15% of its employees (DX 49). Further, Pullman

had closed its New York laundry and its St. Louis repair shop,

thus reducing its plant to one laundry and one repair shop

(PX 14).

As a result of the execution of the agreements with the

clerks and porters and Penn-Central’s withdrawal activities,

the remaining Pullman unions made requests for separation

payment agreements in the summer of 1968 (A. 190-191).

Pullman again took the position that it had no authority under

the USC to bill such costs to the railroads. It stated to the

National Mediation Board:

“The reason for our position is clearly outlined in the

. . . [porters’ and clerks’ cases], in which disputes it was

necessary for the unions to set strike dates in order to get

the issue to the attention of our railroad operators, who had

to approve the assumption of the separation allowance and

displacement allowance expense provided for in those

agreements.” (PX 136).

While the eastern and southern railroads were considering

withdrawals from the USC in early 1968, Great Northern,

ANS OL OLR WAY

"HR OUGH

Northern Pacific and CB&Q (sometimes “Northern Lines”) and

Santa Fe—all major users of Pullman service*—were discussing

withdrawal from the USC among themselves and with Pullman.

Pullman’s president advised the Northern Lines that withdrawal

by a major railroad user could result in a “snowball” effect which

would trigger withdrawals by all other railroads (PX 17, DX

218).

Bohannon’s fear of a “snowball” effect was well-founded,

for on August 20, Pullman was advised by Seaboard Coastline

that Penn Central had insisted upon partial takeover effective

November | and that Seaboard had no choice but to also effect

such a takeover (DX 66A). As a consequence, almost all of

the eastern and southern railroads served notices of partial with-

drawal effective November | (PX 20A-E, DX 53, DX 303).

As such notices of withdrawal were being received, Pullman

advised the railroads that the conductors’ union had “processed

its proposal” under the Railway Labor Act and had said it

would strike on September 14, but that the conductors would

accept the same type of separation pay agreement that had

been executed with the porters. The railroads were asked to

approve the execution of the agreement (PX 18, 19). On

September 11, 1968, Pullman determined that a majority of the

railroads had approved execution of the conductors’ agreement,

and it was signed on September 11 (A. 193).

The Proposal for an Orderly Withdrawal of the Railroads from

Pullman and the USC.

After the spring of 1968, Mr. W. T. Rice, President of Sea-

board, knew that the demise of Pullman was inevitable (A.

264). When the notices of partial withdrawal of the eastern

and southern railroads had been effected, he concluded that the

question was not whether to liquidate Pullman, but when and

* In the first six months of 1968, Santa Fe accounted for WW 4%

and the Northern Lines 14.7% of Pullman operations (PX 120,

pp. 10-11).

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how to do so. On that account, he and Stuart Saunders, Chair-

man of the Penn Central, determined to work out a program

for orderly withdrawals from the USC and the liquidation of

Pullman (A. 270-271, DX 306). On September 6, 1968,

Saunders wrote Rice, saying:

“Following our recent conversation, the Burlington, Great

Northern and Northern Pacific advised us of their plan of

partial withdrawal in November and complete withdrawal

effective March 1, 1969. We have heard informally that

other sleeping car lines are studying the situation.

“This confirms your view that the affected lines should be-

gin thinking of an orderly termination of operations. Be-

cause of the increased costs and other disadvantages of

being the last users of this service, our passenger people

expect an onslaught of such notices in the next several

months.” (DX 305).

Rice and Saunders arranged to schedule a meeting of the rail-

roads for September 27 so as to plan for the termination and

liquidation of Pullman (PX 24, DX 305, 306). President

Bohannon of Pullman attended the meeting, which was held in

Washington, D. C. (A. 266-267, PX 25). He urged the eastern

and southern railroads to retract their notices or, in the alter-

native, to change the effective date of them from November 1 to

January 1, 1969 (A. 271). The roads refused to retract their

notices, but it was agreed to reset the date of the withdrawal to

January 1, 1969, and Bohannon was so advised (A. 271-272,

DX 307-308). The remaining railroads in the east and south

were directed by Bohannon to serve like notices of withdrawal

from the USC (PX 26).

Afterwards on October 8, Bohannon thought that a further

series of withdrawals from the USC was inevitable. He suggested

to the president of the Chicago Burlington & Quincy that all

railroads should partially withdraw on January 1, 1969, in order

to avoid the complications that would result from a further series

of partial withdrawals (DX 248). In rapid succession like notices

of partial withdrawal were received from the western railroads

THR OUGH

(DX 53). It was then apparent that it would no longer be pos-

sible for Pullman to continue to operate sleeping cars. Thus,

Pullman on October 28 wrote each of the remaining contract

railroads requesting that notices of partial withdrawal be given

effective January 1, 1969 (PX 29).

Complete Withdrawal by the Western Railroads.

In early November, while Pullman prepared for the takeover

of the operation of railroad sleeping cars on January 1 (a loss of

at least 42% of its business), Pullman’s president thought and

stated that this takeover was but a first step to a probable subse-

quent takeover of all remaining services (PX 31B). Bohannon’s

prediction had a real basis in fact; for, in early November,

Southern Pacific, Union Pacific, and Milwaukee, which together

accounted for approximately 15% of Pullman operations, were

considering complete withdrawal from the USC (DX 81). Pull-

man made a presentation to these railroads on November 8, and

Bohannon then stated that “take-over of all [remaining] service

[maintenance and shopping] by several railroads would be the

signal for a similar action by all other [railroads]”, which circum-

stance was described as “a snowball” (DX 80). On December

10, Union Pacific and Southern Pacific notified Bohannon that

they would take over the maintenance and shopping of the cars

(a complete withdrawal) on July 1, 1969. In late December,

formal notices of complete withdrawal were received from Santa

Fe, Union Pacific, Southern Pacific, and Milwaukee (PX 35, 36,

37, and 38). Consequently, before year-end 1968, Pullman knew

that western railroads accounting for 25% of operations would

take over the services still remaining under the USC. These

notices were of extreme significance not only to Pullman but to

the other contract railroads. As a result Rice, President of Sea-

board, again arranged for Bohannon to meet with the chief

executives of the railroads in Boca Raton, Florida on January

PGR ES UY A ES I Saiiniiainies aver acted cae

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31, 1969, in order to “have another discussion similar to the one

held in Washington last fall” (PX 41).*

While the Boca Raton meeting was being arranged, Pull-

man met with the shopcraft unions and advised them that the

railroads had not approved execution of a separation payment

agreement for them, that there was particular objection to the

effective date of October 17, but that Pullman would consider

an effective date of January 1 (Tr. 1290-1291, A. 199, DX

343). The unions considered the situation, and there was immedi-

ate agreement to Pullman’s proposal. The agreement was executed

on January 16, 1969 (A. 199-200).

The Meeting at Boca Raton, Florida.

On January 31, and February 1, Pullman’s president

Bohannon attended the meeting at Boca Raton. Some railroads

said they would take over on July 1, and others said they were

taking over on October 1 or November 1. After the president of

the Southern Pacific said, “we had better get this over with”, all

railroads agreed to terminate all remaining Pullman operations

effective August 1, 1969 (A. 212-215).

After February 1, 1969, no sleeping cars were accepted for

overhaul at the Calumet shop, the entire work force there

was laid off, and then the shop was closed. Maintenance activi-

ties in terminals around the country ceased on August 1, 1969

(Tr. 3079-3082).

Payment of Separation Allowances.

Pullman paid 2,125 employees separation allowances which

totaled approximately $15.6 million. The bulk of these payments

were made in the period from August, 1968, through September,

1969.

* The stated purpose of the meeting in Washington, D. C. that

fall was to plan for the termination and liquidation of Pullman, supra,

pp. 12-13.

) THROUGH

REASON FOR GRANTING THE WRIT.

THE DECISION OF THE COURT OF APPEALS VIOLATES

THE MANDATE OF RULE 52(A) OF THE FEDERAL

RULES OF CIVIL PROCEDURE THAT FINDINGS OF FACT

SHALL NOT BE SET ASIDE UNLESS CLEARLY ERRONE-

OUS AND DECISIONS OF THIS COURT ENFORCING

THAT RULE.

In the decision reversing without remandment the judgment

of the District Court, where jurisdiction was based on diversity

of citizenship, the Court of Appeals found that separation pay-

ments made by Pullman to employees terminated by reason of

the cessation of its business operations—Pullman’s non-

operations—were “operating expenses”. That was the crucial

term used in the Uniform Service Contract which had been

executed by Pullman with virtually all of the railroads that fur-

nished sleeping car service. Chief Judge Fairchild dissented. He

found, consistent with the comprehensive opinion of the District

Judge, that such separation payments were not “operating ex-

penses” as that term was used in the contract but costs of liquida-

tion which should rightly be borne by the shareowners of Pull-

man. He, as did the District Judge, made the distinction, estab-

lished by expert accounting evidence and Pullman’s own account-

ing practices, between the expenses of a “going concern” and the

costs of a business in liquidation. The majority failed to make

that distinction or even to recognize that in accounting such a

distinction exists.

The reversal of the judgment by the Court of Appeals is of

exceptional importance, for it will govern not only the parties to

this action but the respective obligations as between Pullman and

numerous other railroads (A. 74). $15 million is at stake. For,

if the decision of reversal stands, Pullman’s last handful of sig-

nificant operators of sleeping cars will be required to bear the

LGR IIOP LB EE

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$15 million which Pullman in its last year paid to long-term

employees because of the termination of its operations. As a

consequence of the decision of reversal, the risk and cost of going

out of business will be shifted from the capital interests or owners

of Pullman to the last customers—a plain injustice.

The majority opinion of the Court of Appeals reaches a result

that overturns the findings of the District Judge which were

based upon substantial expert testimony. Those findings were not

shown to be erroneous let alone clearly erroneous. Further, the

findings that the Court of Appeals substitutes for those of the

District Judge are without any support in the record.

After hearing evidence comprising more than 3,200 pages of

transcript, much of it expert accounting evidence, and consider-

ing more than 600 exhibits, the District Court said:

“The term “operating expenses” is not defined in the Uni-

form Service Contract (“USC”). Even assuming arguendo

that the parties intended to have the railroads guarantee

against operating losses by Pullman (Stip. Ex. F, 268 I.C.C.

473, 479), this does not eliminate the necessity of defining

operating expenses or losses. In the absence of either a

definition in the contract or an established legal definition

of the term “operating expenses,” since it is a term of art

within the accounting profession and it appears that the

parties intended to use it in that sense, parol evidence of

usage within the profession is appropriate when the term is

capable of a definite interpretation. Phillips Petroleum Co.

v. Payne Oil Corp., 146 F. 2d 546, 547 (10th Cir. 1944);

Schrieffer's Motor Serv. Inc. v. United Freight Forwarders,

Inc., 210 F. Supp. 287, 291 (D. Minn. 1962).

“Among accountants, there appears to be a generally ac-

cepted definition of operating expenses. The term includes

those expenses incurred in the conduct of the major activi-

ties of a business which are generally recurrent in nature

and somewhat normal and dependable in their operation.

A non-operating expense is one which is not incurred

directly in the conduct of the normal or major operations

of the business, does not recur at regular intervals, and is

more or less fortuitous in its occurrence.

THR OUGH

TOC ODN

“This Court rejects Pullman's contention that separation

payments are operating expenses simply because signing the

separation pay agreements was necessary to avert strikes

and a need existed for the employees at the time of signing.

It is the circumstances existing at the time payments were

actually made that determines their treatment under the

USC." [Footnote 3 provides: This is supported by Pull-

man’s treatment of insurance premiums paid on policies that

were part of an employees’ group insurance program and a

pension plan, See finding 62, supra.)

“There are circumstances under which separation pay-

ments are properly considered operating expenses, In de-

ciding whether or not separation payments are operating

expenses, the cause of the separations and the materiality

of the payments are relevant.

“While accountants are in general conceptual agreement

about the term “operating expenses,” there is considerable

subjectivity involved in the decision as to when the separa-

tion payments here ceased being operating expenses charge-

able to the railroad-users and became instead chargeable to

surplus. In short, custom and usage within the accounting

profession is not uniform and does not provide definite

standards; accordingly, expert opinion carries less weight

in construing the parties’ intent than might otherwise be the

case.

“The Court is of the opinion that for purposes of deciding

the issue, the operations of Pullman should be divided into

two parts: (1) the full service that included (a) provision

of conductors, porters and other personnel and services re-

quired for operation of the cars and (b) supplying and

maintaining the cars, and (2) the limited service that only

involved supplying and maintaining the cars. This division

corresponds to the contractual provisions for partial and

complete withdrawal. When a railroad partially withdrew

it continued as a Pullman customer for service number 2.

“Both aspects of Pullman’s operations accounted for a

significant portion of its income. The separation pay agree-

ments can be readily identified with either one or the other

parts of Pullman's business. There also came a point in time

when it became clear that Pullman would cease providing

the respective services, After that time the separation pay-

ei Et

ments for employees in that segment of Pullman’s business

were material in amount. This Court is of the opinion that

once it became clear that Pullman was going to discontinue

a segment of its business, separation payments to employees

in that segment of its operations were no longer operating

expenses chargeable to the contract railroads.

“For porters, conductors and others associated with

operations of the cars, (1)(a) supra, the cut-off date for

charging the expenses to the railroads would be October

28, 1968. Sce finding 22, supra, The cut-off date for em-

ployees not in the above category would be January 31,

1969, See findings 27, 28, supra,” (Cert App. A46-A48),

The Court of Appeals does not disturb the finding that the

parties to the USC used the term “operating expenses” therein

in an accounting sense; indeed it endorses that finding, for in

support of its judgment that the separation payments were

operating expenses it relies upon an accounting text or hand-

book (Cert. App. Al3-A14). Indeed, Pullman has conceded

just that, for it said to the District Judge:

“There is litthke doubt that the term “operating ex-

penses” in the Uniform Service Contract has its origins in

railroad accounting.” (Reply Brief, p. 36).

What the Court of Appeals does disturb,-without any showing

of clear error by the District Judge, are the findings as to the

accounting meaning of the term “operating expenses” and the

application of that meaning to the circumstances of this case.

The accounting meaning of “operating expenses” and its

application to the circumstances of this case was not the subject

of documentary evidence; instead, it was the subject of the testi-

mony of expert witnesses—Mr. Kujawa for Pullman and Messrs.

Grogan, Paolo, and Murphy for Great Northern and Northern

Pacific.* On those issues, having observed the respective wit-

nesses, the District Court relied upon the testimony of the experts

* Kujawa was a partner in ‘Arthur “Anderson Co., Grogan, a

partner of Ernst & Ernst; Murphy, a former partner of Price, Water-

house; and Paolo was the former chief accounting officer to the Inter-

state Commerce Commission,

Y THR OUGH

propounded by the petitioners. Their testimony established that in

accounting an “operating expense” is One incur:ed in the con-

duct of the operations of a company, which is generally recur-

rent in nature and normal and dependable in incidence from

year to year. Their testimony further established that separation

payments made to employees by reason of the cessation of

all or a significant part of operation are not “operating ex-

penses” but appropriate charges against the surplus accounts

or accounts other than the operating accounts (Grogan, A,

316-320, 324-326, 330-333, 337-338, 350-355; Paolo, A, 394-

395, 396-398, 409-411; Murphy, A, 423-425, 428). Not only

was that expert testimony substantial, it became virtually over-

whelming because its correctness was confirmed by Pullman's

own accounting practices, For in accounting for loss and ex-

pense incurred from the cessation of its operations, Pullman gen-

erally charged all such loss and expense against surplus and not

as “operating expenses”. In winding up, Pullman charged against

surplus:

(a) The loss on wheel units and batteries used in the

continued operation of sleeping cars.

(b) The loss on the sale of linen.

in the railroad terminal yards.

(d) The loss on material on hand at the Calumet shop

(DX 38-42, A. 290, 274-275).

Pullman’s comptroller testified at trial that such charges against

surplus were proper (A. 290). Likewise, at the end of its

business operations Pullman was confronted with another situa-

tion quite analogous to separation pay, in that it involved em-

ployee-generated costs, when it paid premiums for group in-

surance for its employees. Although these employees had devoted

their years of service at Pullman to operations under the Uni-

form Service Contract, Pullman did not consider these amounts

in the main as operating expenses and did not charge operations;

“mean

instead, quite properly, as its president testified, the amounts

were charged against surplus (A. 290-291, 276-277, 466).

Further, in September 1968, Pullman’s president held the

judgment that any expense arising from Pullman's several

executive employment contracts (which were executed in June,

1967 in order to retain executives for operations) should be

charged against surplus. In discussing the accounting of Pull-

man because of the cessation of its operations, its president

said;

“The liquidation of assets, including obsolete materials,

disposition of facilities, and closing down of operations

would generally be charged to surplus, as also would be

liabilities due to closing down Mexican operations, lia-

bilities arising from executive employment contracts, and

liabilities under group insurance and pension plans.” (PX

25, Tr. 316).

The decision of the Court of Appeals overturning what the

trial found to be the accounting meaning of “operating expenses”

and the application of that meaning to the evidence of the cessa-

tion of Pullman’s operations is in plain violation of Rule 52(a)

of the Federal Rules of Civil Procedure, which governs appellate

review of actions tried without a jury. In pertinent part, that rule

provides:

“Findings of fact shall not be set aside unless clearly

erroncous, and due regard shall be given to the opportunity

of the trial court to judge of the credibility of the wit-

nesses.” Rule 52(a) F. R. Civ. P.

In Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U. S.

100 (1969), this Court, after a grant of the writ, applied the

mandate of that rule in reversing a judgment of the Court of

Appeals which had reversed a judgment of the District Court

awarding damages for the exclusion of an anti-trust counter-

plaintiff from a market. Mr. Justice White said:

“In applying the ciearly erroneous standard to the find-

ings of a district court sitting without a jury, appellate

courts must constantly have in mind that their function

is not to decide factual issues de novo. The authority of

an appellate court, when reviewing the findings of a judge

as well as those of a jury, is circumscribed by the deference

it must give to decisions of the trier of the fact, who is

usually in a superior position to appraise and weigh the

evidence. The question for the appellate court under Rule

52(a) is not whether it would have made the findings the

trial court did, but whether ‘on the entire evidence [it]

is left with the definite and firm conviction that a mistake

has been committed.’ United States v. United States Gypsum

Co., 333 U. S. 364, 395 (1948). See also United States v.

National Assn. of Real Estate Boards, 339 U. S. 485, 495-

496 (1950); Commissioner Vv. Duberstein, 363 U. S. 278,

289-291 (1960).” p. 123.

Such an application of Rule 52(a) is particularly appropriate

where the findings of the trial court deal with matters of a

technical nature which are governed by “principles not usually

contained in the general storehouse of knowledge and ex-

perience.” Graver Tank & Mfg. Co. v. Linde Air Products Co.,

339 U. S. 605, 609-610 (1950). That is precisely the case here,

for the meaning of “operating expenses” and the application of

that meaning to circumstances surrounding a cessation of opera-

tions is a matter of accounting.

Rather than dealing directly with the fact that it is over-

turning findings of fact based on substantial evidence, the

majority opinion of the Court of Appeals appears to attribute

its action to what it considers a more detailed consideration of

the underlying documents and to the “many cases which shed

light on the probable intention of the parties to the Uniform

Service Contract when they used the terms ‘operating expenses,’

‘actual expenses,’ and direct expenses’.” (Cert. App. Al2-A14).

Instead of focusing on the accounting meaning of “operating

expenses” and the application of that meaning to the facts of

this case, the majority attributes significance to the terms “actual

expenses”, “direct expenses” and “indirect expenses”, which are

also found in the USC, supra, p. 6, in order to determine

that the separation pay here was an “operating expense”. This

MER RT eI IP NETS EAN A . i SEE ee PLOTS m |

BIL EED

is a case of “tail wagging dog”, for it is clear from the USC

which, in pertinent part, is set forth in the District Court's

Opinion (Cert. App. A23-A24)* that such terms were used in

the sense of actual operating expenses, direct operating ex-

penses, and indirect operating expenses. To ignore that the

terms “direct expenses” and “actual expenses” are sub-categories

of “operating expenses” and to then equate the meaning of those

terms to the meaning of the term “operating expenses” is

fallacious, for what is “direct” or “actual” is not necessarily an

operating expense. The truth is that the termination payments

here in issue were both “direct” and “actual”—but they were

not “operating expenses”; instead, they were costs of liquidation

occasioned by the cessation of operations,

The infirmity in the reasoning of the majority is not cured

by the citation of five cases, which the majority describes as

“allied” to the issue (Cert. App. Al6), when in fact these cases

are inapposite. This Court in Social Security Board v. Nierotko,

327 U. S. 358 (1946), made no pronouncement concerning dis-

missal pay; it only quoted in a footnote from a regulation of the

Treasury Department which required that dismissal pay be taxed

as “wages” under the Social Security Act. Carragan v. Com-

missioner, {97 F. 2d 246 (2nd Cir. 1952) and Hooker v. Hoey,

27 F. Supp. 489 (S. D. N. Y. 1939) are cited for the proposi-

tion that a “severance allowance” and a “retirement allowance”

are taxable income and not gifts to the recipients thereof. With

the propositions that those cases stand for, we do not disagree.

Nor do we dispute that, as held in Inland Steel Co. v. NLRB,

170 F. 2d 247 (7th Cir., 1948), retirement and pension plans

are bargainable issues within the National Labor Relations Act’s

language of “pay, wages, hours of employment or other condi-

tions of employment”. All of this has been axiomatic for years,

as has the proposition stated in Alabama Power Co. v. FPC,

134 F. 2d 602 (Sth Cir. 1943) that bonuses are wages. These

* The Uniform Service contract and the Appendix thereto are com-

pletely reproduced in Pullman’s Appendix in the Court of Appeals

at pages 23 through 107.

HR OUGH

AR Sem IE = 0 tacos el

PRES at ROR OF

cases are not in point, and they do not establish or purport to

establish the meaning of the term “operating expenses” or that

the separations payments in question here were operating ex-

penses or non-operating expenses.

The Court of Appeals states its justification for overturning

the trial court's findings at the conclusion of its opinion where

it is said:

In allied contexts, separation pay has uniformly been

considered to be a part of wages and part of direct labor

costs. We can only conclude that the separation payments

herein involved were intended by the parties to the Uni-

form Service Contract to be part of “all of Pullman’s ex-

penses of conducting its sleeping car business and com-

missary services” and to be an “operating expense” or

“actual expense” or “direct expense” of such business.

(Cert. App. Al6).

Notwithstanding the fact that the quoted phrase “all-of Pull-

man’s expenses of conducting its sleeping car business and com-

missary service” does not appear in the Uniform Service Contract

but only in the predecessor uniform operating contract, the

conclusion drawn by the majority just does not follow from the

premise—merely because a cost is wages. or akin to wages, or

a direct labor cost does not make it an operating expense.

Would the wages paid to employees guarding Pullman’s idle

physical plant and inactive fleet of sleeping cars and assisting

the auctioneers of that property because of the cessation of opera-

tions be “operating expenses”? Plainly not. Not in an account-

ing sense or in any sense.

Pullman’s comptroller testified that a liquidating expense is

one caused by going out of business (A. 298). Pullman stipu-

lated at the trial that from and after February 1, 1969, it was in

liquidation (A. 208-209). Yet, the bulk of the payments the

majority opinion deems to be operating expenses—$10.7 million

—were made after February 1, 1969 (DX 134).

The Court of Appeals has wholly disregarded the substantial

expert accounting evidence upon which the District Court's find-

BIEETL

ings were based. By reason thereof, the Court of Appeals has

wholly failed to discharge the appellate review required by Rule

$2(a).

PRAYER FOR WRIT OF CERTIORARI.

WHEREFORE, Petitioners pray this Court’s writ of certiorari

issue to review and reverse the judgment of the Court of Appeals

for the Seventh Circuit in this case.

Respectfully submitted,

JOHN H. BisHop,

135 South LaSalle Street,

Chicago, Illinois 60603,

Attorney for Petitioners.

Of Counsel:

JAMES J. FLYNN,

One IBM Plaza,

Chicago, Illinois 60611.

Dated: June 30, 1975.

LILO ALY NEEL LIL TES LASERS iv ’ ERLE PI ES PAI EEL NET REE ET

THR OUGH

GEV le ENON LIP RTI

me Ree pee ee va

etn ei ee OR

reo: CL

APPENDIX.

IN THE UNITED STATES COURT OF APPEALS

For the Seventh Circuit.

Nos. 74-1493, 74-1494

THE PULLMAN COMPANY,

Plaintiff-A ppellant,

VS.

THE GREAT NORTHERN RAILWAY COMPANY and THE

NORTHERN PACIFIC RAILWAY COMPANY,

Defendants-A ppellees.

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division

No. 70 C 267

RICHARD W. MCLAREN, Judge.

Argued January 23, 1975—Decided April 17, 1975

Before FAIRCHILD, Chief Judge, SwYGERT and SPRECHER,

Circuit Judges.

SPRECHER, Circuit Judge. The question presented by this

appeal is whether separation payments made to terminated em-

ployees by The Pullman Company by reason of the cessation of

its sleeping car operations constitute “operating expenses” to be

borne by railroads which had contracted to use sleeping car

service.

—"LIKC onl ive il

ESET ODER MTEL NIE ONE ELIA IE PTB ADRES CML LEL NA TORE A EOIS. A OE

A2 OPINION OF THE COURT OF APPEALS

George M. Pullman organized the Pullman Palace Car Com-

pany in 1867, which built Pullman sleeping cars and operated

them under contracts with railroads. In 1899 the company be-

came The Pullman Company; in 1924 Pullman Car & Manufac-

turing Corporation was formed to operate the manufacturing

business; in 1927 Pullman Incorporated was created as a holding

company, holding all of the stock of Pullman Car & Manufactur-

ing Corporation (which in 1934 became Pullman-Standard Car

Manufacturing Company) and all except a small fraction of the

stock of The Pullman Company.

In a suit filed by the United States, the District Court for the

Eastern District of Pennsylvania, finding that a monopoly existed

in violation of Section 2 of the Sherman Act, entered a decree

on May 8, 1944 requiring Pullman Incorporated to divest itself

of either the manufacturing business conducted by Pullman-

Standard or the sleeping car business conducted by The Pullman

Company.

Pullman Incorporated elected to divest itself of its interest

in the sleeping car business and the properties used in con-

nection therewith. On June 30, 1947, the stock of The Pull-

man Company was sold to 59 railroads, who purchased the same

percentage of Pullman Company stock as their percentage of

total Pullman car use during the year 1940.

The Interstate Commerce Commission approved the stock

sale to the railroads and also the execution by Pullman of agree-

ments with each of the railroads utilizing its service in the form

of a “Uniform Operating Contract,” pursuant to which Pullman

operated and serviced sleeping cars, received fares paid by

Pullman patrons, and pooled and allocated revenues and ex-

penses among the railroads which used Pullman’s services.

Proposed Pooling of Railroad Earnings and Service Involved in

Operation of the Pullman Company under Railroad Ownership,

268 I. C. C. 473 (1947).

e RES Si Rie i a Fs aS | SEI EEE RR PG IRCCS BO OMEN ERM I SNORE 2 PEE ED

RiFeE]

THR OLIGH

OPINION OF THE COURT OF APPEALS A3

The Uniform Operating Contract provided that if in any

contract year total gross earnings were less than Pullman’s

“Expenses of Operation,” the railroads would pay Pullman the

amount of the deficiency. “Expenses of Operation” were defined

to include “all of Pullman’s expenses of conducting its sleeping

car business and commissary services,” except income taxes, and

except the cost of operating air conditioning equipment which

cost would be paid directly by each railroad instead of being

pooled.

The Interstate Commerce Commission concluded that these

provisions required the contracting railroads to assure the operat-

ing expenses of the “joint enterprise” by participating “in a

guaranty against operating losses by Pullman.” Jd. at 479.

Effective July 1, 1949, the Uniform Operating Contract was

replaced by the “Uniform Service Contract,” which provided in

Section 7(c) that “[i]Jf for any Contract Year the expenses

allocated to the Railroad plus the 3% return on Pullman’s

investment allocated to the Railroad, shall exceed the revenues

allocated to the Railroad, the Railroad shall pay to Pullman the

amount of the deficiency.” The Contract specified that “[e]x-

penses to be accounted for under this contract shall include the

following: (A) Operating Expenses, (B) Taxes other than

Federal Taxes on Income, (C) Rental for Cars.”

An amendment to the Uniform Service Contract, Appendix A.

became effective January 1, 1956 and provided in part that

“[a]ctual expenses shall be segregated into the following [ten]

general cost groups,” including such items as “Car Repairs,”

“Conductors” and “Porters.” Appendix A also provided that:

Each of the above groups shall include direct and

indirect expenses pertaining thereto, as well as appropriate

proportions of district and general administrative expenses

and taxes, other than Federal taxes on income, as provided

for in Pullman’s “Classification of Accounts,” as pre-

scribed by the Interstate Commerce Commission.

a |

an oe Sane

A4 OPINION OF THE COURT OF APPEALS

This Classification of Accounts is also known as Pullman’s

System of Accounts, establishing several categories of accounts,

including property accounts, revenue accounts, expense accounts,

income accounts, earned surplus accounts and balance sheet

accounts. Each category contains accounts in which specific items

are to be included. The System of Accounts also established vari-

ous clearing accounts.

The separation payments involved in this appeal were charged

by Pullman to a clearing account, 6-22, General Administration,

which included “[plensions and relief expenses not otherwise

provided for; . . . and other expenses.”

During the years following World War II, travel in the

United States increasingly moved by automobile and airplane at

the expense of the railroads. Under the Uniform Service Contract,

a railroad had the right to withdraw wholly or partially from the

Contract and to assume the functions theretofore served by

Pullman.

A complete withdrawal, for which six months’ written notice

to Pullman was necessary, required the particular railroad to

furnish and operate its own sleeping cars and maintain them in

shops of its own choosing. A partial withdrawal, for which a

60 days’ written notice to Pullman was customarily given, re-

quired the particular railroad to operate sleeping cars with its

own conductors and porters, while continuing to obtain cars from

and having them maintained and shopped by Pullman.

On July 1, 1958, the New York Central Railroad withdrew

completely from Pullman service on most of its lines. In 1967

and 1968, several roads withdrew partially, and these and most

of the other roads were in the process of considering complete

withdrawal.

The chief executives of the Pullman contract railroads met in

Boca Raton, Florida, on January 31, 1969, to consider a uni-

form withdrawal date. The two principal executives of Pullman

attended the meeting. At the meeting all the contract railroads,

PRESS AS PALE TE SIME N ST I

BILE!

OPINION OF THE COURT OF APPEALS AS

including the two defendant railroads, The Great Northern and

The Northern Pacific, and the Burlington which they jointly

owned, indicated their decision to withdraw completely effective

August 1, 1969. At that time it became certain that the rendition

by The Pullman Company of a sleeping car service would come

to an end and that Pullman would go out of business. Shortly

after the Boca Raton meeting, all of the remaining contract

railroads gave notice of complete withdrawal effective as of

August 1, 1969.

Throughout the period of declining railroad and Pullman

business, the railroad unions began to negotiate for job termina-

tion agreements with the railroads.

On May 21, 1936, most of the railroads had executed the so-

called Washington Job Protection Agreement with the Order of

Railway Conductors whereby conductors who lost their jobs as

the result of a consolidation, merger or pooling of facilities would

receive 60 percent of their compensation for a period up to five

years, or, in the alternative, a lump-sum separation allowance.

On December 9, 1963, the conductors entered into the Wolfe-

Wise Agreement, subsequently ratified by 31 railroads including

The Great Northern and The Northern Pacific, whereby a con-

ductor who lost his job as the result of the withdrawal of a

Pullman contract railroad had the option of receiving 60 percent

of his compensation for up to 24 months or the lump-sum

separation allowance provided in the Washington Job Protection

Agreement.

The Brotherhood of Sleeping Car Porters entered into the

Wolfe-Randolph Agreement on December 17, 1963, subse-

quently ratified by 33 railroads, including The Great Northern

and “The Northern Pacific, whereby porters offered employment

by a withdrawing Pullman contract railroad would retain the

same employment rights they had at Pullman but receive no

separation pay in the event of the loss of their jobs.

The six shopcraft unions obtained an agreement from the

railroads on September 25, 1964, extending the Washington

> THROUGH

A6 OPINION OF THE COURT OF APPEALS

Job Protection Agreement to discontinuances of services. The

Brotherhood of Railway and Steamship Clerks obtained an agree-

ment from the railroads on February 7, 1965, extending certain

separation rights to clerks.

The railroad unions then began to negotiate for job termina-

tion agreements with The Pullman Company. The porters and

clerks made the first demands on Pullman.

On March 13, 1968, Pullman sent a letter to the chief

executives of the Pullman contract railroads, advising that it

would enter into separation pay agreements with the porters and

clerks if railroads which together incurred more than 50 percent

of Pullman’s 1967 expenses of operations approved its doing so.

It indicated that any expenses incurred pursuant to the agree-

ments, if executed, would be charged to the contract railroads in

proportion to their 1967 percentage of Pullman’s operations.

In response, none of the contract railroads. including The Great

Northern or The Northern Pacific, objected to the indicated

method of allocating the separation pay expenses. Contract rail-

roads, including The Northern Pacific, which together incurred

91.2464 percent of Pullman’s 1967 expenses of operations,

approved Pullman’s execution of the agreements. The Great

Northern did not approve.

Therefore, on May 27, 1968, Pullman entered into substan-

tially identical separation pay agreements with the porters and

clerks. The agreements provided that employees in active service

with Pullman on November 13, 1967, would receive a lump-sum

separation allowance of $2,500 from Pullman if they accepted

employment by a railroad and nothing if they refused such em-

ployment. Furloughed employees would receive separation pay

equal to 360 days’ pay, depending on their length of service.

After demands by the conductors, Pullman submitted a draft

of a separation pay agreement involving the conductors to the

contract railroads for approval. Railroads, including The North-

ern Pacific, which together incurred 65 percent of Pullman’s

OPINION OF THE COURT OF APPEALS A7

1968 expenses of operations, approved Pullman’s execution of

the agreement. The Great Northern disapproved. Thus, Pullman

on September 11, 1968, executed a separation pay agreement

with the conductors which was patterned after the porters’ and

clerks’ agreements. In submitting the agreement to the railroads,

Pullman stated that expenses incurred pursuant to the agreement

would be charged to the contract railroads in proportion to their

1968 percentages of Pullman’s expenses of operations. None of

the responses to Pullman, including those of The Great Northern

and The Northern Pacific, expressed any objection to the charg-

ing of expenses to the contract railroads.

Pullman had entered a partial separation pay agreement with

the six shopcraft unions on July 19, 1966. Following the porters’

and clerks’ agreements, the shopcrafts demanded equal separation

pay benefits. On January 16, 1969, Pullman entered into an

agreement with the shopcraft unions, which was similar to the

porters’ and clerks’ agreements except that it did not provide

for the transfer allowance of $2,500. Railroads accounting for

74.5535 percent of the Pullman operating expenses for the

first six months of 1968 approved of the modified agreement

with the shopcrafts.

On January 29, 1969, Pullman executed a separation pay

agreement with its supervisors through the American Railway

Supervisors Association. This agreement was similar to that

executed with the shopcrafts and had been part of the solicitation

of and approval by a majority oj the contract railroads of the

shopcraft agreement.

In June 1967, Pullman had entered into employment con-

tracts with 21 of its executives and key employees, which required

Pullman to maintain various benefits. On November 4, 1968,

the board of directors of Pullman approved a resolution that

its non-union employees be paid the pattern separation allow-

ance. Pullman did not enter into a separation pay agreement

with United Transport Service Employees, representing its

laundry workers.

A8 OPINION OF THE COURT OF APPEALS

In regard to the separation pay negotiations and agreements,

the district court made the following significant finding of fact:

Pullman’s negotiations with respect to each separation

pay agreement it entered into were at arm’s length. On each

occasion on which Pullman committed itself to making

separation payments, there was no decision to cease the

operations involved and Pullman acted with the reasonable

expectation that in its operations there would be a need

to employ the group of employees to whom it agreed to

pay the separation allowances, although the duration of

that need was not clear.

During the period June 1968 to October 1971, Pullman made

separation payments to its employees totalling $15,647,461.05

in accordance with the various agreements and the board reso-

lution of November 4, 1968. It billed the separation pay expenses

to the Pullman contract railroads as operating expenses in

proportion to their respective shares of Pullman’s operating

expenses in the years in which the seperation pay liabilities

were incurred.

The amount billed by Pullman to The Great Northern for

separation pay and not paid was $537,630.22. The amount billed

to The Northern Pacific and not paid was $458,282.17.

Pullman brought suit against The Great Northern and The

Northern Pacific to recover the separation pay expenses not paid.

Each railroad in turn filed a three-count counterclaim seeking

to recover separation pay expenses previously billed by Pullman

and paid by each road. The foregoing is a summary of the district

court’s 62 findings of fact, none of which are disputed by the

parties.

Il.

The complaint against The Great Northern (Count I) and

The Northern Pacific (Count Il) as well as Count I of the

counterclaim of each of those roads raised essentially the same

issues and were disposed of together by the district court, which

phrased the issues as follows:

OPINION OF THE COURT OF APPEALS A9

Pullman's theory is that under the Uniform Service Con-

tract the railroads were obligated to pay all operating

expenses and that, since the separation pay agreements

were entered into at a time when there was a need for

the employees and were necessary to avert strikes, the costs

associated with those agreements are reimbursable operating

expenses.

.. . Great Northern and Northern Pacific have taken the

position they are under no obilgation to reimburse Pull-

man for separation payments that were made once it was

determined not to operate or to cease Pullman sleeping

car operations in the United States or to litigate, dissolve

or cause the cessation of such operations.

As noted in part I supra, the district court found that the

final separation pay agreements were entered into with the

various groups of Pullman employees upon the following dates:

Porters and Clerks — May 27, 1968

Conductors — September 11, 1968

Non-union — November 4, 1968

Shopcrafts — January 16, 1969

Supervisors — January 29, 1969

The court further found that the decision to cease all oper-

ations and to liquidate Pullman was made at the Boca Raton

meeting on January 31, 1969, a date subsequent to the conclu-

sion of all separation pay agreements. Consequently, the court

found that “at the time each of the separation pay agreements

was entered into, there had been no decision to terminate the

operations involved and that there was a need to employ the

group of employees to which it was agreeing to pay the separation

allowances.”

The Interstate Commerce Commission in 1947 had approved

the operating agreements between Pullman and the contracting

railroads, characterizing the agreements as follows:

The contract would make an important change from the

present arrangement, due to the fact that in the future each

Al0 OPINION OF THE COURT OF APPEALS

contracting railroad would have to participate in a guar-

anty against operating losses by Pullman.

268 I. C. C. at 479.

Both The Great Northern and The Northern Pacific were appli-

cants in that proceeding seeking approval of the agreements.

Id, at 493. The Order of Railway Conductors had intervened

and expressed concern over the possible effect of the changes on

Pullman employees.

In reassuring the employees, the Commission pointed out that

the District Court for the Eastern District of Pennsylvania, in

approving the sale of Pullman stock to the railroads on January

4, 1946, had ordered:

This order is made without prejudice to the rights of the

employees of the Pullman Company under existing con-

tracts and practices.

Id. at 494,

The Commission further mollified the Pullman employees

by noting:

In October 1945 the railroad buying group gave the follow-

ing assurance in writing, which was repeated in their inter-

vening petition in the district court and is reiterated in

this record by the applicants:

The Pullman Company under its railroad ownership

will faithfully perform and keep the obligation and

commitments to labor under the outstanding agree-

ments and practices according to the law of the land.

Id. at 491.

At that time the railroads had already executed the 1936

Washington Job Protection Agreement with the conductors,

providing for separation allowances. Thus, there was nothing

extraordinary in The Pullman Company's negotiating and

eventually executing the separation pay agreements of 1968

and 1969. Furthermore, Pullman obtained the express approval

of the railroads which incurred more than 50 percent of its

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OPINION OF THE COURT OF APPEALS _ Ail

expenses of operations prior to executing each of the separation

pay agreements.

The district judge found that the term “operating expenses”

is not defined in the Uniform Service Contract. He then held

that in the absence of either a definition in the contract or an

established legal definition and that “since it is a term of art

within the accounting profession and it appears that the parties

intended to use it in that sense, parol evidence of usage within

the profession is appropriate when the term is capable of a

definite interpretation.”

Having heard some expert testimony,* however, the district

judge observed:

While accountants are in general conceptual agreement

about the term “operating expenses,” there is considerable

subjectivity involved in the decision as to when the separa-

tion payments here ceased being operating expenses charge-

able to surplus. In short, custom and usage within the

accounting profession is not uniform and does not provide

definite standards; accordingly, expert opinion carries less

weight in construing the parties’ intent than might other-

wise be the case.

The district judge then concluded:

This Court is of the opinion that once it became clear that

Pullman was going to discontinue a segment of its business,

separation payments to employees in that segment of its

operations were no longer operating expenses chargeable

to the contract railroads.

* The district court drew the following conclusion:

Among accountants, there appears to be a generally accepted

definition of operating expenses. The term includes those

expenses incurred in the conduct of the major activities of a

business which are generally recurrent in nature and somewhat

normal and dependable in their operation. A non-operating

expense is one which is not incurred directly in the conduct

of the normal or major operations of the business, does not

recur at regular intervals, and is more or less fortuitous in its

occurrence.

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Al2 OPINION OF THE COURT OF APPEALS

For porters, conductors and others associated with oper-

ations of the cars, . . . the cut-off date for charging the

expenses to the railroads would be October 28, 1968... .

The cut-off date for employees not in the above category

would be January 31, 1969.

The reference to October 28, 1968 pertains to the court's

finding that “[b]y October 28, 1968 railroads using a sub- f

stantial majority of Pullman’s sleeping car services had either

served or intended to serve notices of partial withdrawal effective

January 1, 1969.”

Accordingly, the court entered judgment in favor of Pullman

for those separation payments made to the respective groups of

employees before the cut-off dates and in favor of Great Northern

and Northern Pacific for any payments made to Pullman in

respect to separation payments after the cut-off dates. As a

result judgment was entered in favor of Great Northern for

$183,513.16 plus costs and in favor of Northern Pacific for

$158,844.49 plus costs.

Il.

We affirm and adopt the district court’s findings of fact

numbered 1 through 62. We part with the court in some of the

conclusions it reaches in applying those facts.

In the first place, the court disposed of the basic documents

we are interpreting in too summary a fashion.

Article IV, Secton 1(c) of the original Uniform Operating

Contract, which had been approved by the Interstate Commerce

Commission, provided that:

If, for any contract year, the total gross earnings of all

sleeping cars operated under the terms of this contract

shall be less than the total amount of Pullman’s “Expenses

of Operation” of such cars . . . , the Railroad shall pay

to Pullman the amount of the deficiency.

Article IV, Section 3 provided in part:

Except as herein otherwise provided, the term “Ex-

penses of Operation” as used in this contract shall include

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OPINION OF THE COURT OF APPEALS A\l3

all of Pullman’s expenses of conducting its sleeping car

business . . . and also including but not limited to the

various items elsewhere herein expressly provided to be

included in “Expenses of Operation”; ... .

Article V, Section 1 provided in part that “[tJhis contract

shall be construed liberally so as to secure to each party all

the rights, privileges and benefits herein provided or manifestly

intended... .”

The later adopted Uniform Service Contract provided in

Section 7(c):

If for any Contract Year the expenses allocated to

the Railroad plus the 3% return on Pullman’s investment

allocated to the Railroad, shall exceed the revenues al-

located to the Railroad, the Railroad shall pay to Pullman

the amount of the deficiency.

In an appendix the Uniform Service Contract specified that

“[e]xpenses to be accounted for under this contract shall in-

clude the following: (A) Operating Expenses. . . .” The Con-

tract appendix provided that “[a]ctual expenses shall be segre-

gated into the fo ‘owing [ten] general cost groups” and that

“{e]ach of the above groups shall include direct and indirect

expenses pertaining thereto, as well as appropriate proportions

of district and general administrative expenses. . . .”

In a book dealing with accounting and the law it was said

that:

The cost of direct labor has long been recognized as a

basic cost chargeable directly to the particular product or

service with which it is associated. For legal and account-

ing purposes, the cost of direct labor is not limited to

wages paid, but embraces within its meaning various direct

economic benefits to workers flowing from the employ-

ment relationship.

* * *

Direct items have been identified and distinguished from

indirect labor and from general and administrative ex-

pense, particularly in decisions as to reimbursement under

contracts of the cost-reimbursable type. Thus, included in

Al4. OPINION OF THE COURT OF APPEALS

cost of direct labor in addition to wages are overtime pre-

mium pay, vacation pay, pay for “coffee breaks” and

holidays not worked, pay for travel time, standby pay,

severance pay, and incentive pay.

G. Hills, “The Law of Accounting and Financial Statements,”

194-97 (1957).

The parties have not directed us to any case, nor have we

found one, which is directly on point, but there are many

cases which shed light on the probable intention of the parties

to the Uniform Service Contract when they used the terms

“operating expenses,” actual expenses,” and “direct expenses.”

In holding that “back pay” shall be treated as “wages” under

the Social Security Act, the Supreme Court pointed out that

“dismissal pay” constitutes wages. Social Security Board Vv.

Nierotko, 327 U. S. 358, 366, n. 17 (1946). Wages, in turn,

are direct labor expenses.

The Second Circuit held in Carragan v. Commissioner, 197

F. 2d 246, 248 (2d Cir. 1952), that a severance allowance upon

liquidation of the employing corporation was additional com-

pensation to the employee for past services and not a tax-free

gift. Earlier the Second Circuit had held that “retiring allow-

ances” constituted taxable income as one form of compensation

for personal service. Hooker v. Hoey, 27 F. Supp. 489 (S. D.

N. Y.), aff'd, 107 F. 2d 1016 (2d Cir. 1939).

In Inland Steel Co. v. NLRB, 170 F. 2d 247 (7th Cir.

1948), we held that an employer must bargain with respect to

retirement or pension plans since they fall within the National

Labor Relations Act’s language of “pay, wages, hours of em-

ployment or other conditions of employment.” The Supreme

Court denied certiorari upon the pension issue in 336 U. S.

960 (1949), and affirmed the balance of the opinion in Ameri-

can Communications Ass'n Vv. Douds, 339 U. S. 382 (1950).

In Alabama Power Co. v. FPC, 134 F. 2d 602 (Sth Cir.

1943), in determining reimbursable construction costs under

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OPINION OF THE COURT OF APPEALS _ AI15

the Federal Power Act, the Fifth Circuit held that bonuses to

employees are “often considered good business as tending to

satisfy employees with their wages, and as an incentive to

greater effort. . . . [The bonuses] were paid for labor, and

not from philanthropy, and ought to be included with the wages

they supplemented, as construction costs.” Jd. at 610.

In summary, the railroads, with the approval of the Inter-

state Commerce Commission, agreed “to participate in a guar-

anty against operating losses by Pullman.” 268 I. C. C. at 479.

In the original Uniform Operating Contract, approved by the

Commission, the railroads agreed to pay Pullman “all of Pull-

man’s expenses of conducting its sleeping car business and com-

missary services.” In the subsequent Uniform Service Contract,

also approved by the Commission, the railroads agreed to pay

Pullman’s expenses including “operating expenses” and “actual

expenses,” which include “direct and indirect expenses.”

Pullman had been placed on notice by the District Court

for the Eastern District of Pennsylvania in 1946 and by the

Commission in 1947 to observe the rights of its employees,

which by then already included in regard to conductors separa-

tion allowances under the 1936 Washington Job Protection

Agreement. Beginning as early as 1960, the various unions

pressed for expanded separation pay rights. The Great Northern

and The Northern Pacific joined with most of the railroads in

granting separation pay allowances in 1963 to the conductors

and porters, in 1964 to the shopcrafts and in 1965 to the

clerks.

After succeeding with the railroads, the unions pressed Pull-

man to enter into similar separation pay agreements. Pullman

executed the various agreements in 1968 and early 1969 only

after the threat of strikes by each union (findings 41, 46, 53,

56) and after the approval by a majority of the railroad users

of Pullman service as to each contract. The railroads were ad-

vised prior to approving that Pullman intended to charge the

separation pay expenses to the railroads in accordance with

Al6 OPINION OF THE COURT OF APPEALS

the Uniform Service Contract and none of them, including The

Great Northern or The Northern Pacific, objected.

The district court expressly found that the Pullman negotia-

tions with respect to each separation pay agreement were at

arm’s length, that each commitment to make separation pay-

ments was made prior to the decision to cease operations and

that Pullman acted with reasonable expectation that there would

be a need to continue to employ each group of employees in-

volved (finding 59).

Pullman charged the separation payments to clearing ac-

count 6-22, General Administration, which was part of the

System of Accounts approved by the Interstate Commerce Com-

mission on October 4, 1950, and which included “[p]ensions

and relief expenses not otherwise provided for . . . and other

expenses.”

In allied contexts, separation pay has uniformly been con-

sidered to be a part of wages and part of direct labor costs.

We can only conclude that the separation payments herein in-

volved were intended by the parties to the Uniform Service

Contract to be part of “all of Pullman’s expenses of conducting

its sleeping car business and commissary services” and to be

an “operating expense” or “actual expense” or “direct expense”

of such business.

Insofar as the district court entered judgment in favor of

Great Northern and Northern Pacific against Pullman in respect

of separation payments, the judgment is reversed and the cause

remanded with directions to enter judgment in favor of Pull-

man and against Great Northern and Northern Pacific as sought

in Counts I and II of the complaint and under Count I of the

respective counterclaims. We affirm the judgments in favor of

Pullman and against Great Northern and Northern Pacific under

Counts II and III of the counterclaims for the reasons expressed

by the district court.

REVERSED IN PART; AFFIRMED IN PART.

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OPINION OF THE COURT OF APPEALS AIl7

FAIRCHILD, Chief Judge, dissenting in part.

I respectfully dissent, in part.

It seems to me that Judge McLaren’s definition of an operat-

ing expense as an expense “incurred in the conduct of the

major activities of a business which [is] generally recurrent in

nature and somewhat normal and dependable in [its] opera-

tion” is reasonable. I agree that the cost of separation pay is

an operating expense to an on-going business, but here the ex-

pense has become a cost of liquidation. Such cost ought to be

borne by the company’s shareholders in proportion to their

ownership interests, not in proportion to their use of the com-

pany’s assets.

Pullman’s treatment of liabilities arising from executive em-

ployment contracts and under group insurance and pension

plans confirm the soundness of this distinction. Both the execu-

tive employment agreements, which in substance provided pro-

tection in the event the business terminated, and the employee

insurance and pension plans were executed to attract and re-

tain qualified employees to run Pullman's operation. Yet, once

it was decided to liquidate the business these liabilities were

quite properly charged to surplus. I can see no meaningful dis-

tinction between these expenses and the separation allowances

the majority now deems to be “operating expenses.”

Accordingly, I would affirm the judgment of the district

court in all respects.

een sere

Al8

IN THE UNITED STATES DisTRICT COURT,

For the Northern District of Illinois,

Eastern Division.

THE PULLMAN COMPANY, >

Plaintiff,

Vs.

+ No. 70 C 267

THE GREAT NORTHERN’ RAILWAY

COMPANY and the NORTHERN

RAILWAY COMPANY,

Defendants. 7

MEMORANDUM OPINION AND ORDER.

This matter was tried on the merits before the Court and

without a jury. At issue is whether or not the defendant rail-

roads are obligated to reimburse The Pullman Company (“Pull-

man”) for separation payments made by Pullman to various

employees. Pullman alleges that the separation payments are

“operating expenses” chargeable to its users pursuant to the

contract between Pullman and its users; the theory being that

at the time Pullman signed the agreements obligating it to make

the separation payments, there was a continuing need for the

employees involved and the agreements were necessary in order

to continue operations. The defendants take the position that

the separation payments are not “operating expenses” for which

they are obligated to reimburse Pullman, but are instead charge-

able to Pullman’s surplus accounts.

The defendants filed counterclaims. Count I alleges that

Pullman wrongfully billed defendants for separation payments

and that defendants erroneously paid such charges, but are now

entitled to a refund for such amounts as were erroneously paid.

Count II alleges that Pullman, its officers and agents owed de-

OPINION OF THE DISTRICT COURT Al9

fendants a duty to terminate employees in connection with the

cessation of operations and the liquidation of Pullman without

incurring unnecessary or unwarranted severance pay liabilities

to Pullman’s employees. It is further alleged that, contrary to

specific requests from defendants, Pullman did unnecessarily

incur such liabilities, with the result that defendants will re-

ceive a lesser amount in liquidation of Pullman than would

otherwise be available for distribution. Count III alleges that

Pullman wrongfully failed to comply with its Interstate Com-

merce Commission approved System of Accounts in accounting

for separation payments to its employees and that by reason

thereof the defendants were billed for such expenses in viola-

tion of their contract with Pullman. Defendants demand that

Pullman refund those amounts that were allegedly wrongfully

billed.

When this suit was filed The Southern Railway Company was

also named as a defendant, but a settlement was agreed upon

between it and Pullman. It appears that the other user-railroads

have reimbursed Pullman for the cost of separation payments.

However, Pullman has stated that it will apply the result in this

case to the other user-railroads. In this regard, it should be

noted that each of the user-railroads was also a shareholder.

At one time every Pullman shareholder contracted with

Pullman for the provision of sleeping car services, but by the

time the separation payment agreements were entered into be-

tween Pullman and the unions, some of the shareholders had

discontinued the use of such services. The instant dispute thus

centers around whether the costs of the separation payments

will be paid by the railroads who were continuing to use Pull-

man services in proportion to their use at a given time or

whether the costs will be paid by all shareholders in proportion

to their stock ownership.

The following constitute the Court’s findings of fact.

A20 OPINION OF THE DISTRICT COURT

JURISDICTION.

1. When this action was filed, The Pullman Company

was an Illinois corporation with its principal and only place

of business in Chicago, Illinois. The Great Northern Railway

Company was a Minnesota corporation, and The Northern

Pacific Railway Company, a Wisconsin corporation. Both

railroad companies maintained their principal places of busi-

ness in St. Paul, Minnesota. There is, therefore, diversity of

citizenship between the parties.

HIsTORY OF THE PULLMAN COMPANY.

2. In 1867, George M. Pullman organized Pullman’s Palace

Car Company, which became The Pullman Company in 1899.

Between 1867 and 1899, the company acquired several other

sleeping car companies, and on December 31, 1899 became

the only sleeping car company in the United States. Between

1900 and 1935, The Pullman Company acquired substantially

all of the sleeping car facilities of every railroad which during

that period had owned and operated its own sleeping cars. As

of 1939, The Pullman Company furnished and serviced, under

contracts with the railroads, virtually all of the sleeping cars

operated in the United States.

3. From 1881 until 1924, The Pullman Company manu-

factured, with a few exceptions, all new sleeping cars used by

it in furnishing Pullman sleeping car service to the railroads.

In 1924, Pullman Car & Manufacturing Corporation was organ-

ized to operate the manufacturing business which had there-

tofore been conducted by The Pullman Company. In 1927,

Pullman Incorporated was created as a holding company, holding

all of the stock of Pullman Car & Manufacturing Corporation and

all except a small fraction of the stock of The Pullman Com-

pany. In 1934, Pullman Car & Manufacturing Corporation

changed its name to Pullman-Standard Car Manufacturing

Company.

OPINION OF THE DISTRICT COURT A21

4. On July 12, 1940, the United States filed suit under

the Sherman Act in the United States District Court for the

Eastern District of Pennsylvania against The Pullman Company,

Pullman-Standard Car Manufacturihg Company, and Pullman

Incorporated. In an opinion rendered April 20, 1943, the Dis-

trict Court, 50 F. Supp. 123, found that a monopoly, in vio-

lation of Section 2 of the Sherman Act, had been established.

5. The final decree entered May 8, 1944 required Pull-

man Incorporated to divest itself of either the sleeping car

business conducted by The Pullman Company or the manu-

facturing business conducted by Pullman-Standard and, as

long as it continued in the sleeping car business, to furnish

and service its sleeping cars to any railroad on request on a

reasonable and nondiscriminatory basis.

PURCHASE OF THE PULLMAN COMPANY BY THE RAILROADS

AND THE POOLING ARRANGEMENT UNDER

WHICH IT WAS TO BE OPERATED

6. Thereafter, Pullman Incorporated elected to divest itself

of its interest in the sleeping car business and properties used

in connection therewith. On June 30, 1947, the stock of The

Pullman Company was sold to 59 railroads, who purchased

the same percentage of Pullman stock as their percentage of

total Pullman car use during the year 1940. Apart from the

combining of percentages consequent to railroad mergers, those

stock percentages have remained the same at all times since.

7. The sale of the stock of The Pullman Company (here-

after “Pullman”) to the railroads followed approval by the

Interstate Commerce Commission of the sale, 268 I. C. C. 473.

The Interstate Commerce Commission also approved the sale

by Pullman of all of its sleeping cars regularly assigned to

railroads to the railroads to whom they were assigned, the

retention by Pullman of the balance of its sleeping cars as

a poo! available for use by the railroads when needed, and

A22 OPINION OF THE DISTRICT COURT

the lease from the railroads of the cars sold in exchange for

rent. It approved the execution by Pullman of agreements with

each of the railroads utilizing its services in the form of a

‘Uniform Operating Contract,’ pursuant to which Pullman

operated and serviced sleeping cars, received fares paid by

Pullman patrons, and pooled and allocated revenues and ex-

penses among the railroads which used the cars and services

of Pullman.

8. The Uniform Operating Contract provided that if in any

contract year total gross earnings of all sleeping cars operated

under the contract were less than Pullman’s “Expenses of

Operation,” the railroads would pay to Pullman the amount of

the deficiency. “Expenses of Operation” were defined to include

“all of Pullman’s expenses of conducting its sleeping car busi-

ness and commissary services,” except income taxes, and except

the cost of maintaining and operating air conditioning ap-

paratus which the contract provided would be paid directly

by the railroads rather than pooled. The Interstate Commerce

Commission found, with respect to these provisions, that the

contracting railroads assured the operating expenses of the

“joint enterprise” by participating “in a guaranty against oper-

ating losses by Pullman,” 268 I. C. C. 473, 479.

9. As a result of complaints by some of the railroads that

the method of allocating expenses under the Uniform Operating

Contract was unfair to them, and following an engineering

study of Pullman’s operations, Pullman, effective July 1, 1949,

entered into contracts in the form of the Uniform Service Con-

tract with each railroad then utilizing Pullman sleeping car

service, including the Great Northern and the Northern Pacific

which remained parties to it until August ', 1969. The Uniform

Service Contract had to receive the approval of the ICC. 49

U. S.C. § 5(1). While the Uniform Service Contract changed

the method of allocation provided in the Uniform Operating

Contract, it left undisturbed the obligation of the contracting

railroads to pay to Pullman the amount of any deficiency in

OPINION OF THE DISTRICT COURT A23

its operating expenses. It provided, Sec. 7(c), that “[i]f for any

Contract Year the expenses allocated to the Railroad plus the

3% return on Pullman’s investment allocated to the Railroad,

shall exceed the revenues allocated to the Railroad, the Rail-

road shall pay to Pullman the amount of the deficiency.” It

specified that “[e]xpenses to be accounted for under this con-

tract shall include the following: (A) Operating Expenses,

(B) Taxes other than Federal Taxes on Income, (C) Rental

for Cars.” It divided “actual expenses” into ten cost groups

and stated that each group “shall include direct and indirect

expenses pertaining thereto.”

An amendment to the Uniform Service Contract, Appendix

A, became effective January 1, 1956. As amended, the per-

tinent provisions of Appendix A provided:

“Expenses

Expenses to be accounted for under this contract shall

include the following:

(a) Operating Expenses;

(b) Taxes other than Federal Taxes on Income;

Expenses relative to operations in Mexico are excluded.

Assignment to Railroads

Actual expenses shall be segregated into the following

general cost groups:

I Car Repairs-Shop (separately by classes of cars)

Il Car Repairs-Yard (separately for Electrical and

Other )

Ill Car Distribution

IV Car Cleaning

V Conductors

VI Porters

VII Linen, Laundry and Car Supplies

VIII

(a) Advertising

A24 OPINION OF THE DISTRICT COURT

(b) Traffic (Tariffs) and Revenue Accounting

IX Car Ownership (separately by classes of cars)

X Commissary

Each of the above groups shall include direct and in-

direct expenses pertaining thereto, as well as appropriate

proportions of district and general administrative expenses

and taxes, other than Federal taxes on income, as provided

for in Pullman’s ‘Classification of Accounts’ as prescribed by

the Interstate Commerce Commission.”

10. After the effective date of the Uniform Service Con-

tract, Pullman prepared a System of Accounts and submitted it

to the Interstate Commerce Commission (“ICC”) for approval.

On October 4, 1950, the ICC entered an order approving this

System of Accounts. Pullman was permitted by the terms of the

ICC order to apply the system retroactively to January 1, 1950.

Since that time Pullman has been required by the ICC to abide

by the System of Accounts.

11. As noted in finding 9, supra, Appendix A to the Uni-

form Service Contract provides that for purposes of assigning

expenses to the railroads, the expenses shall be divided into

various cost groups and that each shall include certain expenses

as provided for in Pullman’s “Classification of Accounts.” This

Classification of Accounts is also known as Pullman's System

of Accounts and it will be referred to here as such. Said System

of Accounts established several categories of accounts, including

property accounts, revenue accounts, expense accounts, income

accounts, earned surplus accounts and balance sheet accounts.

Each of those categories contains accounts in which specific

items are to be included. Appendix No. 1 to the System of

Accounts established various clearing accounts. Pullman charged

the separation payments that are disputed here to one of those

clearing accounts—6-22, General Administration—which pro-

vides:

“This account shall include the general administrative

expense that is not includible in other accounts. The ex-

pense[s] assignable to this account are as follows:

OPINION OF THE DISTRICT COURT A25

“(a) Salaries of officers—The pay of the president,

vice presidents in charge of accounting and operations,

general counsel, secretary, treasurer, general auditor, au-

ditor of disbursements, director of sanitation, relief and

safety, and assistants, and officers whose duties are such

that they cannot be specifically charged.

“b) Salaries of clerks and attendants.—The pay of

chief clerks, clerks stenographers, etc. in offices of the

officers listed in the above paragraph (a).

“(c) Other expenses.—Pensions and relief expenses not

otherwise provided for; traveling and other expenses of

employes included in paragraphs (a) and (b) above; di-

rector’s fees and expenses; telegraph expense and telephone

toll service; directories, periodical law books and other

expenses. Arbitration expense borne by the Company and

sundry licenses; taxes and injury expense to employes that

cannot be localized to specific accounts; also the applicable

proportion of clearing accounts.

“The expense shall be apportioned to the expense ac-

counts (excluding car ownership) on the basis of total

charges to each acount, including charges redistributed to

those accounts from the several clearing accounts.”

The defendants contend that Pullman should have accounted

for the separation payments in an earned surplus account—

613. Miscellaneous Debits—which provides:

“This account shall include all decreases in corporate

resources not properly deductible from current income.

Among these are: loss upon disposition of land, investment

securities, or noncarrier property, or the conversion of land

to noncarrier use; loss in the reacquisition of funded debt

at a premium; unextinguished discount on funded debt

when reacquired; payment of old accounts previously writ-

ten off; and fines or penalties not provided for elsewhere.”

It appears that if the separation payments had not been charged

to that account the user-railroads would not have been billed for

that expense.

A26 OPINION OF THE DISTRICT COURT

DECLINE IN TRAFFIC.

12. During the years following World War II, travel in

the United States underwent substantial change. Millions of

dollars were expended in the construction of four-lane in-

tercity highways. A larger percentage of the population became

automobile owners and used them with increasing frequency to

travel between cities and states, both for business and for per-

sonal reasons. At the same time, with the development of better

and faster airplanes and the construction of commercial airports

at a substantially increased number of locations, airplane travel

increased substantially. On the other hand, the post-war de-

cline of intercity railroad passenger travel was virtually un-

interrupted, with the exception of the Korean War period.

13. During the post-World War II years, the decline of Pull-

man’s business was also virtually uninterrupted, with the excep-

tion of the Korean War period. Its operating revenues were

$132,593.965 in 1946; $95,590,989 in 1956; $50,355,655 in

1962; and $17,778,168 in 1968. It operated 5,531 cars in

1946; 2,666 in 1956; 1,114 in 1962; and 425 in 1968. It had

36,982 employees in 1946; 16,793 in 1956; 6,392 in 1962;

and 2,945 in 1968.

WITHDRAWALS OF PARTICIPATING RAILROADS.

14. Under the Uniform Service Contract, a railroad had the

right to withdraw wholly or partially from the contract and to

assume the functions theretofore served by Pullman under the

contract. If a railroad withdraw completely, for which six

months’ written notice to Pullman was required, it would there-

by undertake to furnish and operate its own sleeping cars and

to maintain them in shops of its own choosing. The railroads

also had the option, for which they customarily gave 60 days’

written notice to Pullman, of withdrawing partially and there-

after operating the cars themselves with their own conductfor]s

OPINION OF THE DISTRICT COURT A27

and porters, while continuing to obtain cars from and having

them maintained and shopped by Pullman.

15. Effective July 1, 1958, the New York Central exer-

cised its right to withdraw completely from Pullman service on

its local lines—service confined to the lines of a single rail-

road—and on all but four of its joint lines—service on the

lines of more than one railroad. Although the New York Cen-

tral was then Pullman’s second largest customer, representing

somewhat less than one-sixth of its total business, Pullman

assured the other contract railroads that it was able to effect

economies which would prevent the New York Central with-

drawal from increasing the cost of Pullman service to its other

customers. Some railroads which were then considering with-

drawing on account of the New York Central withdrawal did

not then do so.

16. In the years that followed the withdrawal of the New

York Central, Pullman, at the request of various railroads, pre-

pared studies and participated in the preparation of studies,

comparing the cost of Pullman service with that which the rail-

roads might incur if they withdrew partially or completely

from the Uniform Service Contract. Nonetheless, there was no

further significant withdrawal from Pullman service until the

Pennsylvania, after litigating its right to do so for five years

following giving notice on May 29, 1962, withdrew partially

on its local lines on August 1, 1967. At the time of the 1962

notice of partial withdrawal, the Pennsylvania was Pullman’s

largest user of sleeping car service and accounted for more

than 15 per cent of Pullman’s total operations.

17. On April 1, 1968 the New York, New Haven and

Hartford Railroad Company notified Pullman that it wished

to withdraw partially from Pullman service, effective June 1,

1968, on its local lines and on those lines that it operated

jointly with Penn-Central. A corresponding notice was received

from Penn-Central partially withdrawing on its joint lines with

the New York, New Haven and Hartford. By notice of April

A SMO RL TOTO TEE at EEG LOE EIN GED CVO ALO VOI! LD SELLE EAB ERE ENO RIE DEAE IW "a

A28 OPINION OF THE DISTRICT COURT

22, Penn-Central notified that it would withdraw completely on

its local lines. However, Penn-Central continued to have full

Pullman service on all joint lines with railroads other than the

New York, New Haven and Hartford.

18. In the spring and summer of 1968, the Penn-Central

put pressure on a number of eastern and southern railroads with

which it maintained joint line service to join it in withdrawing

completely from Pullman service. While neither the Penn-Cen-

tral nor any other eastern or southern railroad gave notice at

that time of complete withdrawal, in late August 1968 the

Illinois Central, the Louisville & Nashville, the R. F. & P. and

the Seaboard, as well as the Penn-Central with respect to the

remainder of its joint lines, gave Pullman novice of partial

withdrawal effective November 1, 1968, which they later

agreed, at Pullman’s request, to make effective as of January

1, 1969.

19. In 1958, 1963, 1965, 1966 and again in 1967, the

Great Northern and the Northern Pacific, and the Burlington

which they jointly owned, compared the cost of Pullman service

with that which they might provide themselves. In December

1967, their joint committee studying the comparative costs rec-

ommended to the operating vice-presidents of the railroads

that a partial withdrawal be effected. It made no recommenda-

tion as to complete withdrawal. During 1967 these railroads

accounted for 14.2% of Pullman’s operations. The operating

vice-presidents, however, referred the matter back to the com-

mittee for further study.

20. On July 26, 1968, the joint study committee recom-

mended that the railroads serve on Pullman notices of partial

withdrawal and six months’ notices of complete withdrawal at

the earliest opportunity. This recommendation was accepted

by the president of the Northern Pacific. However, since the

president of The Great Northern expressed a desire to study

the matter further, and since it was understood that the three

railroads would act jointly, no notice of withdrawal was then

RPE a i a al ae an ie tal a I Oa sical

+ i tak ae 5 ~ - .

OPINION OF THE DISTRICT COURT A29

served by any of the three railroads; and, as of September 27,

1968, no joint decision by the management of the three rail-

roads had been reached as to either a partial or a complete

withdrawal.

21. Following a discussion between the chief executives of

the Seaboard and the Penn Central, arrangements were made by

the president of the Association of American Railroads for a

meeting of the chief executives of the railroads in Washington,

D. C., on September 27, 1968, to discuss the Pullman situation.

The arrangements were made with a view to forestalling a

unilateral complete withdrawal by any of the railroads, which

could increase the cost of Pullman service to those remaining

under the Uniform Service Contract, and to promote joint,

orderly action by the contract railroads, when and to the extent

that the liquidation of Pullman might become appropriate.

George Bohannon, Pullman’s president, was invited to attend.

At the meeting, Bohannon urged that it was in the best interest

of the contract railroads to continue to utilize Pullman services.

He suggested that the railroads which had recently given notice

of partial withdrawal cancel their notices. He was advised that

the railroad executives would consider his views in that regard.

22. The railroads whose notices of partial withdrawal were

outstanding on September 27, 1968 did not cancel their notices

following the meeting held on that date. Within a few weeks,

additional railroads served notice of partial withdrawal. By

October 28, 1968 railroads using a substantial majority of Pull-

man’s sleeping car services had either served or intended to serve

notices of partial withdrawal effective January 1, 1969. On that

date Bohannon sent a letter to the Pullman contract railroads

in which he stated that it would be “impractical and uneco-

nomical for Pullman to attempt to continue full service in the

remaining limited situations and it is therefore expected that

these railroads [that have not served notices of partial with-

drawal] will also promptly serve their notices requesting a partial

form of service to be effective January 1, 1969.” By that date,

ais

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Se lal a Taek east) ron |

ees

A30 OPINION OF THE DISTRICT COURT

if not before, it thus became clear that only a partial form of

service would be performed by Pullman after January 1, 1969.

23. On November 13, 1968, Bohannon informed the C&O-

B&O that it was his opinion that the partial withdrawal of all

railroads which had been noticed for January 1, was, in the

minds of some of the chief executive officers of the railroads, a

probable “first step to complete take over” of Pullman’s sleeping

car service.

24. When the notices of partial withdrawal became effective

on January 1, 1969, Pullman’s business was confined to furnish-

ing, maintaining and shopping cars. With its business so con-

fined, Pullman no longer had occasion to employ conductors or

porters. It did, however, have a need to employ some shopcraft

workers, shop supervisors, and some of the clerks it had thereto-

fore employed.

25. While Pullman had, prior to January 1, 1969, disposed

of all of its other shopping facilities, it retained its Calumet

shop which was the largest and best equipped facility for the

shopping of sleeping cars in the United States.

COMPLETE WITHDRAWAL BY THE REMAINING RAILROADS.

26. On November 5, 1968, the Union Pacific recommended

to the Southern Pacific and the Milwaukee, with which it op-

erated joint lines, that the three railroads give six months’ notice

of complete withdrawal to Pullman on December 1, 1968. On

November 22, 1968, Mr. Bohannan had learned from Mr.

Quinn, President of the CB&Q, that it was probable that the

Northern Lines would withdraw completely from the Uniform

Service Contract (“USC”), effective August 1, 1969. Bohannon

advised Mr. Crippen, President of the Milwaukee, that he ex-

pected that to happen. While the Milwaukee was reluctant to

join the other two railroads in giving the notice, and requested

and obtained from them an extension of time to permit it to

study the matter further, when it appeared that the Union Pacific

Deere RTE EN LR THELEN BELEN TT

OPINION OF THE DISTRICT COURT A31

and the Southern Pacific were adamant, it joined them in serv-

ing a six months’ notice on approximately December 27, 1968,

effective July 1, 1969. The Santa Fe also served a similar notice

on December 23, 1968, to become effective immediately upon

and concurrently with any other notice of withdrawal that was

served thereafter.

27. The notices served by the Union Pacific, Southern

Pacific, Milwaukee, and Santa Fe made it apparent that an

agreement as to joint, rather than unilateral, action by the Pull-

man contract railroads had not been achieved at the meeting on

September 27, 1968. Said notices would tend to intensify the

concern of the other contract railroads that if the four railroads

which had served notice of complete withdrawal actually with-

drew, the cost of Pullman service to those who remained might

be substantially increased, especially if others also withdrew

completely. With these considerations in mind, arrangements

were made for a further meeting of the chief executives of the

Pullman contract railroads to discuss the Pullman situation in

Boca Raton, Florida, on January 31, 1969. Bohannon was

again invited to attend. Prior to January 16, 1969, F. J.

Boeckelman, an employee and subsequently president of Pull-

man, and Bohannon knew that the major railroads were consider-

ing withdrawing from the USC, and Bohannon told Boeckelman

at that time that if the railroads were going to do this on a

wholesale basis that there ought to be a uniform withdrawal

date rather than one railroad doing it one month and another

doing it the next month. Prior to going to Boca Raton, Bohan-

non told Boeckelman that a topic of discussion would be whether

the railroads were going to present a “uniform” notice of with-

drawal from The Pullman Company in 1969.

28. At the meeting at Boca Raton, the Seaboard, which had

a continuing concern as to its inability to shop sleeping cars in

the event Pullman went out of business, tried to persuade the

four western railroads which had served notice in December 1968

of their complete withdrawal to cancel their notices and not to

A32 OPINION OF THE DISTRICT COURT

withdraw until such time as the contract railroads agreed it was

in their interest as a whole to withdraw jointly. After it became

apparent that the four western railroads would not cancel their

notices, all the contract railroads, including the Great Northern,

the Northern Pacific, and the Burlington, which had not there-

tofore served notices of their intent to withdraw completely,

indicated their decision to withdraw and to do so effective August

1, 1969. It thus became certain at this time that the rendition

by Pullman of a partial form of sleeping car service would come

to an end; that Pullman would go out of business; and that it

would go into liquidation.

29. Within a short time after the Boca Raton meeting, the

four western railroads revised their notices to make them effec-

tive August 1, 1969, and all other contract railroads gave notice

of complete withdrawal effective on the same date. Pullman con-

tinued to furnish and maintain cars until August 1, 1969. Since

then, it has not rendered any sleeping car services to the con-

tract railroads, but has instead been in the process of winding

up its affairs, which process commenced after the Boca Raton

meeting.

30. After February 1, 1969, Pullman had the ability to

continue shopping sleeping cars with its then force of shopcraft

employees. Pullman determined, however, to continue to shop

only cars which were in the Calumet Shops on February 1 and

to lay off such employees as such cars were completed.

THE VARIOUS JoB TERMINATION AGREEMENTS.

Background: Union Agreements with the Railroads.

31. By reason of the continuing decline in the number of

conductors employed by Pullman, the Order of Railway Con-

ductors (“Conductors”) served Pullman with a notice on No-

vember 7, 1960, pursuant to Section 6 of the Railway Labor

Act, to initiate bargaining for job protection. The notice sought,

among other things, the extension of the benefits of the Wash-

ington Job Protection Agreement, executed by most United

OPINION OF THE DISTRICT COURT A33

States railroads and railroad unions on May 21, 1936, to con-

ductors who lost their jobs with Pullman as a result of the dis-

continuance of a conductor position for any reason.

The Washington Job Protection Agreement was limited to

railroad employees who lost their jobs as an incident to the

consolidation, merger or pooling of railroad facilities by two or

more railroads. The agreement provided that any employee who

retained their jobs, following a consolidation, merger or pooling

of facilities, would not, for a period of five years thereafter, be

placed in a worse position with respect to compensation and

working conditions than they had enjoyed before. It provided

that any employees who lost their jobs, following a consolidation,

merger or pooling of facilities, would receive 60% of their com-

pensation for period up to five years, or, in the alternative, a

lump-sum separation allowance.

32. When Pullman refused to agree to afford the union the

job protection it demanded for its members, the Conductors

progressed their demands to the point of setting a strike date.

After the strike was enjoined and an Emergency Board appointed,

the Board recommended that Pullman, the Conductors and the

railroads enter into an agreement affording some job protection

to conductors who lost their jobs with Pullman as an incident to

the withdrawal of Pullman contract railroads. Ultimately, on

December 9, 1963, two days before the date set by the Con-

ductors for a strike. the National Railway Labor Conference,

the bargaining arm of the railroads, entered into an agreement

[with] the Conductors, known as the Wolfe-Wise Agreement.

Under the terms of the agreement, which was subsequently rati-

fied by thirty-one railroads, including the Great Northern and the

Northern Pacific, if a conductor lost his job as a result of the

withdrawal of a Pullman contract railroad, he had the option of

receiving 60% of his compensation for a period not to exceed

twenty-four months or the lump-sum separation allowance pro-

vided in the Washington Job Protection Agreement. Pullman

was not a party to the agreement.

A34 OPINION OF THE DISTRICT COURT

33. The Brotherhood of Sleeping Car Porters (“Porters”),

confronted with a continuing decline in the number of porters

employed by Pullman, initiated its job protection demands on

Pullman that there be no reductions in forces except those conse-

quent to normal attrition, and that any porter affected by a

change in Pullman’s operations be granted the benefits of the

Washington Job Protection Agreement, with a Section 6 notice

served March 8, 1962. When Pullman refused to agree to pro-

vide job protection for the porters, the Porters pressed their

demands until, on December 17, 1963, three days before the

date set by the Porters for a strike, the National Railway Labor

Conference entered into an agreement with the Porters, known

as the Wolfe-Randolph Agreement. The agreement, which was

subsequently ratified by thirty-three railroads, including the

Great Northern and the Northern Pacific, provided that porters

offered employment by a withdrawing Pullman contract railroad

would retain the same seniority, compensation, and vacation

rights as they had at Pullman. Unlike the Wolfe-Wise Agree-

ment, the Wolfe-Randolph Agreement did not provide separation

pay to those who lost their jobs consequent to the withdrawal

of a Pullman contract railroad. Pullman was not a party to the

agreement.

34. The six shopcraft unions (collectively the “Shopcrafts”)

and the Brotherhood of Railway and Steamship Clerks

(“Clerks”) each served Pullman with a Section 6 notice seeking

job protection which was identical to the notices served on the

railroads nationally. The Shopcrafts did so on October 15,

1962. The Clerks did so on May 31, 1963. In each case, Pull-

man persuaded the unions to await the outcome of the national

negotiations before pressing their demands. On September 25,

1964, the Shopcrafts obtained an agreement from the railroads

extending the job protection and separation pay allowance pro-

visions of the Washington Job Protection Agreement to abandon-

ment and discontinuances of facilities 2-4 services and transfers

of work. The Clerks obtained an agreement from the railroads

OPINION OF THE DISTRICT COURT A35

on February 7, 1965. That agreement required railroads to

maintain their forces intact unless their business declined 5%,

measured in gross operating revenues and net revenue ton-miles.

It also gave fifteen-year employees which the railroads proposed

to transfer or reassign the option of accepting the transfer or

reassignment with their compensation protected, or resigning and

accepting a lump-sum separation allowance.

THE AGREEMENT WITH THE PORTERS AND THE CLERKS.

35. After the execution of the Wolfe-Randolph Agreement

on December 17, 1963, the Porters on May 25, 1964 served a

Section 6 notice on Pullman which was substantially the same

as that served by the Clerks on May 31, 1963. By that means,

the Porters renewed their demand for a limitation on reductions

in forces and the application of the provisions of the Washington

Job Protection Agreement to porters affected by a change in

Pullman’s operations, which it had sought in its Section 6 notice

of March 8, 1962 but had not obtained in the Wolfe-Randolph

Agreement. Negotiations with respect to that aspect of the

Porters’ May 25, 1964 Section 6 notice commenced on April

25, 1965, following the execution of the national agreement with

the Clerks on February 7, 1965. Negotiations with respect to

the Clerks’ May 31, 1963 Section 6 notice were reopened on

March 8, 1965. In both instances, Pullman refused to agree to

the application of the force reduction provisions of the Febru-

ary 7, 1965 national agreement to it, on the ground that the net

revenue ton-mile criterion of that agreement had no relevance

to Pullman’s operations.

36. When Pullman persisted in its opposition to the freight

ton-mile criterion at a joint conference with the Porters and the

Clerks in November 1966, both unions invoked the services of

the National Mediation Board, which held a joint conference in

January 1967. No agreement was reached. After the Porters

set a strike for October 13, 1967, the National Mediation Board

arranged a conference which was held on October 11, 1967.

A36 OPINION OF THE DISTRICT COURT

Although Pullman again refused to agree to the force reduction

terms of the February 7, 1965 agreement, it did indicate a

willingness to enter into a lump-sum separation pay agreement

if the Pullman contract railroads approved its doing so. Pullman’s

draft of such an agreement was rejected on November 28, 1967

by the Porters which continued to insist on the terms of the

February 7, 1965 agreement.

37. On November 14, 1967, Pullrnan reached a tentative

understanding with the Clerks as to a separation pay agreement.

The execution of that agreement was conditioned by Pullman

on its obtaining the National Railway Labor Conference’s ap-

proval of its terms, and on its obtaining authorization from the

Pullman contract railroads to bill any separation payments made

pursuant to its terms. Thereafter, Pullman secured the agreement

of the Clerks to revisions suggested by the National Railway

Labor Conference, and the approval of the Conference to. the

agreement as revised.

38. A short while later, Pullman rejected a counter-

proposal by the Porters and the National Mediation Board ar-

ranged a joint conference of Pullman, the Porters and the Clerks

on March 5, 1968. At that conference, the Board persuaded

the Porters to accept the terms of a separation pay agreement.

Thereafter, Pullman obtained the National Railway Labor

Conference’s approval of the submission by Pullman to the rail-

roads of the draft of the separation pay agreement with the

Porters.

39. On March 13, 1968, Pullman sent a letter to the chief

executives of the Pullman contract railroads, advising that it

would enter into the separation pay agreements with the Porters

and the Clerks if railroads which together incurred more than

fifty percent of Pullman’s 1967 expenses of operations approved

its doing so. It indicated that any expenses incurred pursuant

to the agreements, if executed, would be charged to the con-

OPINION OF THE DISTRICT COURT A37

tract railroads in proportion to their 1967 percentage of Pull-

man’s operations.’

40. In response none of the contract railroads, including

the Great Northern and the Northern Pacific, objected to the

indicated method of allocating the separation pay expense. Rail-

roads which together incurred more than fifty percent of Pull-

man’s 1967 expenses of operations did object, however, to one or

more features of the draft agreements, including the provision

that those furloughed by Pullman after November 13, 1966

were eligible for separation pay and the provision that the

railroads, under implementing agreements, pay a separation al-

lowance of $2,500 to employees offered employment by a rail-

road.

41. When the National Mediation Board was advised of the

responses Pullman had received, the Board proposed that the

draft agreements be modified so as to eliminate one year of

retroactivity and to provide for the payment by Pullman, rather

than the railroads, of a separation allowance of $2,500 to em-

ployees taken over by the railroads. That proposal was accepted

by the Porters and the Clerks, and by Pullman subject to the

submission of the revised drafts to the contract railroads for

approval . Pullman was advised on May 3, 1968 that the Porters

and the Clerks had set May 28, 1968 as the date on which they

would strike if Pullman did not enter into the agreements. The

railroads were informed of this strike date in a letter of May

16, 1968 from Bohannon.

1. In late 1967, Pullman management, particularly Boeckel-

man, was of the opinion that Pullman would need the approval of the

railroads for it to recoup from the railroads whatever amounts

Pullman would pay to employees under separation pay agreements.

Earlier, Boeckelman and Bohannon had considered securing an

amendment to the Uniform Service Contract to accomplish this;

however, they apparently concluded that such an amendment could

not be secured from the railroads, and no amendment was sub-

mitted. An alternative was devised in late 1967, in discussions be-

tween Bohannon and Boeckelman, to the effect that the proposed

separation pay agreement would be submitted to the roads, and

if a majority of the roads approved, Pullman would execute the

agreement and recover its costs from all of the using railroads.

ATG como]

CS RT IN, det ENF aii BN WAR

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A38 OPINION OF THE DISTRICT COURT

42. The revised agreements were submitted by Pullman to

the chief executives of the contract railroads on May 16, 1968.

Thereafter, execution thereof by Pullman was approved by

contract railroads, including the Northern Pacific, which together

incurred 91.2464% of Pullman’s 1967 expenses of operations.

The Great Northern did not approve the execution of these

agreements. Approval by some of the railroads resulted in part

from fear that a strike would take place if no agreement were

reached and that such a strike would tie up the nation’s ireight

as well as passenger service.

43. Pullman entered into substantially identical separation

pay agreements with the Porters and the Clerks on May 27, 1968.

As executed, the agreements recognized the right of Pullman to

reduce its forces as required by emergency conditions and

technological, operational or organizational changes, but pro-

tected those covered by the agreements against being placed in

a worse position with respect to compensation. As to all em-

ployees in active service with Pullman on November 13, 1967,

the agreements provided that employees offered employment

by a railroad would receive a lump-sum separation allowance of

$2,500 from Pullman if they accepted the employment, and

nothing if they did not. The agreements provided that furloughed

employees would receive separation pay equal to 360 days’ pay,

depending on their length of service. The execution by Pullman

of these agreements set a pattern for other unions whose mem-

bers were employed by Pullman.

THE AGREEMENT WITH THE CONDUCTORS.

44. On January 30, 1968, the Conductors initiated a de-

mand, like that of the Porters and the Clerks, for the applica-

tion of the force reductions provisions of the February 7, 1965

agreement to its members, by serving a Section 6 notice on

Pullman. At a conference with Pullman held shortly thereafter,

the Conductors agreed not to press their demand until after

OPINION OF THE DISTRICT COURT A39

the negotiations of the Porters and the Clerks had been con-

cluded, and a pattern had thereby been established. At that

meeting Pullman gave the Conductors a copy of the draft

separation agreement with the Porters, which draft was modi-

fied to apply to the Conductors.

45. After Pullman executed separation pay agreements with

the Porters and the Clerks on May 27, 1968, the Conductors

contracted Pullman and arranged a further conference which

was held on June 3. At that conference, the Conductors asserted

that they were entitled to a separation pay agreement like those

executed on May 27. Pullman delayed the execution of an

agreement with the Conductors which would follow the pattern

set by the May 27 agreements, thereby forcing the Conductors

to consume the time involved in taking the steps which the

Railway Labor Act made a condition precedent to setting a

strixe date. Pullman took the position that a strike date had to

be set in order to get the matter before the railroads which had

to approve the assumption of the separation allowances.

46. The Conductors were not able to set a strike date

until after the National Mediation Board closed its file on August

14, 1968. They then, on August 20, set a strike for September

14. Only thereafter did Pullman submit a draft of a separation

pay agreement with the Conductors to the Pullman contract

railroads for approval. Railroads, including the Northern Pacific,

which together incurred 65% of Pullman’s 1968 expenses of

operations, approved Pullman’s entering into the agreement. in

order to avert the strike which the Conductors expressed an

intention to press to the point of disrupting the nation’s rail-

roads. The Great Northern disapproved the execution of the

Conductors’ agreement. Based on the approvals received, Pull-

man, on September 11, 1968, executed a separation pay agree-

ment with the Conductors, which was patterned after the Porters’

and Clerks’ agreements and substantially similar to them.

47. In submitting the draft separation pay agreement with

the Conductors to the Pullman contract railroads for approval,

A40 OPINION OF THE DISTRICT COURT

Pullman stated that expenses incurred by it pursuant to the

agreement would be charged to the Pullman contract railroads

in proportion to their 1968 percentages of Pullman’s expenses

of operations. None of the responses to Pullman’s letter of sub-

mission, including those of the Great Northern and the Northern

Pacific, expressed any objection to the charging of the expenses

to the Pullman contract railroads.

THE AGREEMENT WITH THE SHOPCRAFT UNIONS.

48. Following the execution of the national agreement with

the Shopcrafts on September 25, 1964 (para. 32 supra), the

Shopcrafts met again with Pullman with respect to its Section 6

notice of October 15, 1962. At that meeting, Pullman refused

to agree to the application of the provisions of the September

25, 1964 agreement to it in the event a Pullman contract rail-

road withdrew. After the Shopcrafts set a strike for March 31,

1965, the Shopcrafts took down their strike notice, negotiations

with Pullman were suspended, and the National Railway Labor

Conference undertook negotiations with the Shopcrafts which

culminated in the execution of an agreement between them on

January 26, 1966. That agreement (the “Wolfe-Fox Agree-

ment”) provided that employees transferred with the work or

deprived of employment following a withdrawal by a Pullman

contract railroad would receive all of the protective benefits of

the September 25, 1964 agreement, except a separation allow-

ance. Pullman was not a party to the Wolfe-Fox Agreement,

which was ratified by twenty-five railroads, including the Great

Northern and the Northern Pacific.

49. After the Wolfe-Fox Agreement was ratified by the

railroads, Pullman, on July 19, 1966, entered into an agreement

with the Shopcrafts which applied the provisions, including the

separation allowance provision of the pattern agreement of

September 25, 1964, to Pullman, except in the event a Pullman

contract railroad withdrew.

OPINION OF THE DISTRICT COURT A4l

50. On June 4, 1968, eight days after the execution of the

Porters’ and Clerks’ pattern agreements of May 27, 1968, the

Shopcrafts asked Pullman to enter into a separation pay agree-

ment affording the same benefits to them to the extent those

benefits were not already provided in the agreement of July 19,

1966. With a view to delaying the time when circumstances

might force Pullman to execute such an agreement, Pullman

declined to do so, and thereby relegated the Shopcrafts to ex-

pending the time involved in exhausting the procedures required

by the Railway Labor Act as a condition precedent to setting a

strike date.

51. As of August 7, 1968, Mr. Robert E. Duckworth,

General Chairman of one of the Shopcraft unions and Secretary-

Treasurer of System Federal 122, an affiliate of the Railway Em-

ployees Department, AFL-CIO, came to the conclusion, and so

reported to the President of the Railway Employees Department,

AFL-CIO, that “Pullman was going out of business.”

52. The Shopcrafts did not initiate the procedures specified

in the Railway Labor Act until it served a Section 6 notice on

August 31, 1968, after Pullman had already submitted a draft

of the Conductors’ separation pay agreement to the Pullman

contract railroads for approval. The union sought to have the

agreement apply to employees furloughed by Pullman subse-

quent to November 1967. Twelve days later, Pullman advised

the Shopcrafts that its notice was technically deficient.

53. On September 16, 1968, the Shopcrafts served a new

Section 6 notice. When Pullman refused to submit a separation

pay agreement to the Pullman contract railroads for approval

until the Shopcrafts had exhausted the procedures required by

the Railway Labor Act, the Shopcrafts exhausted those pro-

cedures as rapidly as possible since they feared Pullman would

go out of business, and set a strike date for December 31, 1968.

However, when Pullman indicated that it needed thirty days in

which to determine whether the contract railroads would ap-

ONS a |

A42 OPINION OF THE DISTRICT COURT

prove the execution of a separation pay agreement, the Shop-

crafts, on December 16, set the strike date for January 17, 1969.

54. After obtaining the consent of the National Railway

Labor Conference, Pullman, on December 19, 1968, advised

the contract railroads that it would enter into the then draft sepa-

ration pay agreement with the Shopcrafts if railroads which

together incurred more than fifty percent of Pullman’s estimated

expenses of operation for the first six months of 1968 approved

its doing so. The railroads were informed that the effective date

had not been agreed upon, but that the union was insisting that

it be retroactive to October 17, 1968. A provision for payment

of $2,500 to employees who accepted employment with a rail-

road was also included.

55. Railroads accounting for 68.1543 percent of Pullman’s

estimated expenses of operation for the period January 1 through

June 30, 1968 did not approve the agreement as submitted.

Further discussions with the unions resulted in a proposed agree-

ment having an effective date of January 1, 1969 and which

deleted the provision for a transfer allowance of $2,500. Pull-

man did not submit the modified agreement to the contract rail-

roads for approval. It did re-tally the responses to its letter of

December 19, concluding that roads accounting for 74.5535

percent of operating expenses would agree in light of the changes

in the agreement. On January 16, 1969 Pullman and the Shop-

craft unions entered into the agreement as modified.

THE AGREEMENT WITH THE AMERICAN RAILWAY

SUPERVISORS ASSOCIATION.

56. The American Railway Supervisors Association (“Super-

visors”) initiated its demand for a separation pay agreement

with a notice served on June 17, 1968, three wecks after the

execution of the May 27, 1968 agreements. When Pullman

challenged the notice, the Supervisors served a new notice on

July 20, which sought a separation pay agreement patterned

OPINION OF THE DISTRICT COURT A43

on the Clerks’ agreement. In early October, after the Supervisors

progressed their demand for a separation pay agreement to the

point of setting a strike date, Pullman agreed to enter into a

separation pay agreement with the Supervisors like whatever

agreement it ultimately entered into with the Shopcrafts, if the

Supervisors took down their strike notice, which they did. After

the submission by Pullman of the Shopcrafts’ agreement and the

substance of the Supervisors’ agreement to the contract railroads

on December 19, 1968; and after the separation pay agreement

with the Shopcrafts had been executed, Pullman on January 29,

1969, executed a separation pay agreement with the Supervisors

like that executed with the Shopcrafts.?

THE AGREEMENTS WITH NON-UNION EMPLOYEES.

57. In June 1967, Pullman entered into executive employ-

ment contracts with twenty-one of its executives and key em-

ployees. These agreements required Pullman to maintain the

then existent salary of each of the employees at its current

level and in the event of termination prior to normal retire-

ment the employee would be paid monthly a sum equal to

the difference between what the employee would have received

if he retired at normal retirement date and the amount he was

entitled to receive under the Pullman Pension Plan as of the

date of actual termination. On November 4, 1968, the board

of directors of Pullman approved a resolution that its non-

union employees be paid the pattern separation allowance. At

that same meeting the declaration of a dividend from paid-in

2. A copy of the Supervisors’ Agreement was not submitted to

the contract railroads. However, it had been stated in Bohannon’s

cover letter that if the agreement with the Shopcraft unions was

entered into, a similar agreement would be reached with the Super-

visors. The last sentence of that letter asked for advice “as to

whether your railroad does or does not approve Pullman executing

the proposed agreements with its shop craft unions and the super-

visors’ union.” It appears from this that the substance of the

Supervisors’ agreement was before the contract railroads and their

advice on the matter was requested.

LPL RRA 24

A44 OPINION OF THE DISTRICT COURT

surplus, which had been authorized by the shareholders, was

postponed.

ABSENCE OE AGREEMENT WITH LAUNDRY WORKERS.

58. Pullman did not enter into a separation pay agreement

with the United Transport Service Employees (“Laundry

Workers”). On June 22, 1968, Pullman entered into an agree-

ment settling a wage dispute with the Laundry Workers, which

agreement contained a clause barring the Laundry Workers from

serving a further Section 6 notice until January 1, 1970. When

the Laundry Workers asked Pullman to waive the provision

to permit it to serve a Section 6 notice for a separation pay

agreement, Pullman refused to do so.

ARM’S LENGTH NEGOTIATIONS.

59. Pullman’s negotiations with respect to each separation

pay agreement it entered into were at arm’s length. On each

occasion on which Pullman committed itself to making separa-

tion payments, there was no decision to cease the operations

involved and Pullman acted with the reasonable expectation

that in its op2rations there would be a need to employ the group

of employees to whom it agreed to pay the separation allowances,

although the duration of that need was not clear.

SEPARATION PAYMENTS.

60. During the period June 1968 to October 1971, Pullman

made separation payments to its employees totalling $15,647,-

461.05 in accordance with the provisions of its separation pay

agreements and its board resolution of November 4, 1968.

It billed its separation pay expenses to the Pullman contract

railroads as operating expenses in proportion to their respective

shares of Pullman’s operating expenses in the years in which

the separation pay liabilities were incurred. In the years in

OPINION OF THE DISTRICT COURT A45

which Pullman’s separation pay liabilities were incurred, its

gard to its separation pay expense. The total sum billed by

Pullman to the Great Northern for separation pay, but which

was not paid, amounts to $537,630.22. The total sum billed

by Pullman to the Northern Pacific for separation pay, but which

was not paid, amounts to $458,282.17.

61. Pullman followed the practice of acounting for gain

or loss on sales of land, buildings, equipment (including cars)

and material and supplies which had been employed in its

operations by crediting the gains or charging the losses to

corporate income or surplus and not to operations.

62. In 1969, Pullman paid insurance premiums in con-

nection with an employees’ group insurance program and a

pension plan. Of the amounts so paid, $568,222 was charged

to surplus and $26,947 was charged to operations.

Il.

This Court has jurisdiction of the parties and the subject

matter of this action.

Counts I and II of the complaint and Count I of the counter-

claims of the Great Northern and the Northern Pacific raise

essentially the same issues and can be disposed of together.

Between May 9, 1969 and December 30, 1969, Pullman

submitted statements to the Great Northern and the Northern

Pacific for alleged operating expenses. These statements in-

cluded Pullman expenses arising out of severance payments made

by Pullman to certain of its employees. Pullman’s theory is

that under the Uniform Service Contract the railroads were

obligated to pay all operating expenses and that, since the

separation pay agreements were entered into at a time when there

was a need for the employees and were necessary to avert

strikes, the costs associated with those agreements are reimburs-

able operating expenses.

A46 OPINION OF THE DISTRICT COURT

In their answers to the complaint, in their affirmative de-

fenses thereto, and in Count I of their counterclaims, Great

Northern and Northern Pacific have taken the position they are

under no obligation to reimburse Pullman for separation pay-

ments that were made once it was determined not to operate or to

cease Pullman sleeping car operations in the United States or to

liquidate, dissolve or cause the cessation of such operations.

This Court has found that the decision to cease all operations

and to liquidate Pullman was made at the Boca Raton mecting

on January 31, 1969. See findings 28, 29, supra. At trial and

in their post-trial briefs, counterplaintiffs have taken the position

that separation payments made prior to the final determination

to liquidate Pullman should not be charged to them.

Count I of the counterclaims alleges that certain payments

were attributable to liabilities undertaken subsequent to the

time when Pullman decided to cease operations and liquidate.

Granted that some of the separation pay agreements were

entered into after partial withdrawal by all the railroads was a

fait accompli, this Court has found that at the time each of the

separation pay agreements was entered into, there had been

no decision to terminate the operations involved and _ that

there was a need to employ the group of employees to which

it was agreeing to pay the separation allowances. Finding 56,

supra. In light of this finding, it is only the actual payment

of separation allowances that is relevant here.

The term “operating expenses” is not defined in the Uniform

Service Contract (“USC”). Even assuming arguendo that the

parties intended to have the railroads guarantee against oper-

ating losses by Pullman (Stip, Ex. F, 268 I. C. C. 473, 479),

this does not eliminate the necessity of defining operating

expenses or losses. In the absence of either a definition in the

contract or an established legal definition of the term “opera-

ting expenses,” since it is a term of art within the accounting

profession and it appears that the parties intended to use it in

that sense, parol evidence of usage within the profession is

— ,

OPINION OF THE DISTRICT COURT A47

appropriate when the term is capable of a definite interpreta-

tion. Phillips Petroleum Co. v. Payne Oil Corp., 146 F. 2d 546,

547 (10th Cir. 1944); Schrieffer’s Motor Serv. Inc. v. United

Freight Forwarders, Inc., 210 F. Supp. 287, 291 (D. Minn.

1962).

Among accountants, there appears to be a generally accepted

definition of operating expenses. The term includes those ex-

penses incurred in the conduct of the major activities of a bus-

iness which are generally recurrent in nature and somewhat nor-

mal and dependable in their operation. A non-operating

expense is one which is not incurred directly in the conduct of

the normal or major operations of the business, does not recur

at regular intervals, and is more or less fortuitous in its occur-

rence,

This Court rejects Pullman’s contention that separation pay-

menis are operating expenses simply because signing the sep-

aration pay agreements was necessary to avert strikes and a

need existed for the employees at the time of signing. It is the

circumstances existing at the time payments were actually made

that determines their treatment under the USC.*

There are circumstances under which separation payments

are properly considered operating expenses. In deciding whether

or not separation payments are operating expenses, the cause

of the separations and the materiality of the payments are rel-

evant.

While accountants are in general conceptual agreement

about the term “operating expenses,” there is considerable sub-

jectivity involved in the decision as to when the separation

payments here ceased being operating expenses chargeable to

the railroad-users and became instead chargeable to surplus.

In short, custom and usage within the accounting profession is

not uniform and does not provide definite standards: accord-

3. This is supported by Pullman’s treatment of insurance pre-

miums paid on policies that were part of an employees’ group in-

surance program and a pension plan. See finding 62, supra.

A48 OPINION OF THE DISTRICT COURT

ingly, expert opinion carries less weight in construing the parties’

intent than might otherwise be the case.

This Court is of the opinion that for purposes of deciding

the issue, the operations of Pullman should be divided into two

parts: (1) the full service that included (a) provision of con-

ductors, porters and other personnel and services required for

operation of the cars and (b) supplying and maintaining the

cars, and (2) the limited service that only involved supplying

and maint. ining the cars, This division corresponds to the con-

tractual provisions for partial and complete withdrawal. When

a railroad partially withdrew it continued as a Pullman custo-

mer for service number 2.

Both aspects of Pullman’s operations accounted for a signifi-

cant portion of its income. The separation pay agreements can

be readily identified with either one or the other parts of Pull-

man’s business. There also came a point in time when it became

clear that Pullman would cease providing the respective services.

After that time the separation payments for employees in that

segment of Pullman’s business were material in amount. This

Court is of the opinion that once it became clear that Pullman

was going to discontinue a segment of its business, separation

payments to employees in that segment of its operations were

no longer operating expenses chargeable to the contract rail-

roads,

For porters, conductors and others associated with operations

of the cars, (1)(a) supra, the cut-off date for charging the

expenses to the railroads would be October 28, 1968. See

finding 22, supra. The cut-off date for employees not in the

above category would be January 31, 1969. See findings 27,

28, supra.

Accordingly, judgment is entered in favor of Pullman for those

separation payments made to the respective groups of employees

before the above cut-off dates. Judgment (including the right

to a refund ‘f payments were in fact made in this respect) is

OPINION OF THE DISTRICT COURT A49

entered in favor of Great Northern and Northern Pacific for

any payments made to Pullman in respect of separation payments

made to the respective groups of employees after the above cut-

off dates. The parties are directed to prepare and submit to .he

Court within sixty (60) days hereof a draft judgment order

setting forth the dollar amounts to which the parties are en-

titled under this formula.

Ii.

Count II of each countercomplaint alleges that Pullman, its

officers, agents and employees owed Great Northern and Northern

Pacific the duty not to incur or pay unnecessary or unwarranted

severance pay liabilities to Pullman employees and that un-

necessary and unwarranted liabilities were incurred and paid

in violation of this alleged duty. The factual findings do not

support the allegations that the separation pay agreements were

unnecessary or unwarranted and accordingly judgment is entered

against the counterplaintiffs and in favor of counterdefendants

on Count II of the countercomplaints.

IV.

Count III of each countercomplaint alleges that Pullman was

required by the ICC to apply an ICC-approved System of Ac-

counts and that Pullman deviated from that System of Accounts

when accounting for severance pay to its employees. It is alleged

and admitted by Pullman that the System of Accounts was to be

used by Pullman as the basis for distributing expenses under the

USC. It is further alleged that Great Northern and Northern

Pacific were entitled to rely, and did rely, upon Pullman to

determine its operating expenses for billing under the USC in

compliance with the System of Accounts.

There is no doubt that Pullman was obligated to maintain

the ICC-approved System of Accounts and to make periodic

reports to the ICC. In a “letter opinion” dated November 10,

1971, Judge Decker denied Pullman’s motion to dismiss Count

ASO OPINION OF THE DISTRICT COURT

Ill. He noted there that 49 U. S. C. § 20(5) made it unlawful

for any carrier to keep its accounts contrary to the rules, regula-

tions or orders of the ICC and that 49 U. S. C. §§ 8 and 9

provide a private right of action for injury resulting from viola-

tion of the Interstate Commerce Act.

In order for Great Northern or Northern Pacific to recover

as a result of Pullman’s alleged failure to comply with its System

of Accounts, it must be established that the Uniform System of

Accounts determines which expenses are to be charged against

the railroads. In short, even if Pullman had not properly ac-

counted for severance pay under its System of Accounts, injury

to the participating railroads would not automatically follow.

Section 7(c) of the Uniform Service Contract provides that:

“[iJf for any Contract Year the expenses allocated to the

Railroad plus the 3% return on Pullman’s investment allo-

cated to the Railroad, shall exceed the revenues allocated

to the Railroad, the Railroad shall pay to Pullman the

amount of the deficiency.”

It is this section which obligates the railroads to reimburse

Pullman for certain expenses. However, that provision by itself

does not indicate which expenses are reimbursable and reference

to other provisions of the contract is required. The relevant

provisions are § 7(a) and Appendix A to the USC. Section

7(a) provides:

“[w]ithin 90 days after the close of each Contract Year,

Pullman shall furnish a statement, by car lines, of revenues,

expenses, and a 3% return on Pullman’s investment, allo-

cated to the operations on the Lines of the Railroad under

this contract, in accordance with Appendix A attached to

and made a part of this contract.”

Appendix A, as originally adopted and as amended in 1956,

provides, inter alia, that:

“[e]xpenses to be accounted for under this contract shall

include the following:

(A) Operating Expenses

OPINION OF THE DISTRICT COURT AS1

(B) Taxes other than Federal Taxes on Income

Under these provisions, an accounting must precede a deter-

mination of what each railroad owes Pullman. Under Appendix

A, as amended, the Uniform System of Accounts is material to

this accounting, but it only functions to assist in allocating the

pooled operating expenses among the participating railroads.

The history of the USC and its predecessor, the Uniform Op-

erating Contract, helps clarify the relationship between the USC

and Uniform System of Accounts. The USC, which became effec-

tive July 1, 1949, was adopted because the allocation of oper-

ating expenses under the Uniform Operating Contract was

deemed unfair to some of the participating railroads (Step. Ex.

I, 276 I. C. C. 6). The urfairness arose from the fact that

pooled operating expenses were being allocated on a car-days-

operated basis. To remedy this unfairness, the USC established

ten principal categories or cost groups and a number of sub-

categories. Relevant units of service were assigned to each

group. Price tables were also established for each service unit

and expenses were to be allocated to individual railroads by

applying those prices to the railroad’s actual use of service

units.

When the USC became effective on July 1, 1949 Appendix

A did not make reference to the Uniform System of Accounts.

Shortly thereafter, however, Pullman requested the ICC’s per-

mission to revise its then existing system of accounts. The

purpose of this revision was to eliminate the dual recording

of operating expenses that was then necessitated: one set of

records under the existing system of accounts for purposes of

reporting to the ICC and the other under the USC for purposes

of contract settlements between Pullman and the railroads.

(Def. Ex. 365-1). Pullman was granted permission by the ICC

to institute the proposed USC. See finding 10, supra. When

Appendix A was amended effective January 1, 1956, specific

reference was made to the System of Accounts.

A52 OPINION OF THE DISTRICT COURT

However, the System of Accounts has relevance only in

terms of allocating the operating expenses. The allocation of

separation payments was made in proportion to the railroads’

percentage of Pullman operations in a given year and counter-

plaintiffs do not complain of this method of allocation. They

object instead to the fact that the cost of separation payments

was charged to the railroads. Based on the language of the USC

and the intent of the parties, the Court is of the opinion that

the railroads were required to reimburse Pullman for operating

expenses should such expenses exceed revenues and the 3%

return on Pullman’s investment. Granted that the term “oper-

ating expenses” is not defined in the USC, the meaning of that

term is not derived from the System of Accounts. Count III of

the counterclaims therefore adds nothing of substance to Count

I thereof. Based on the foregoing, the counterplaintiffs have not

been injured, if as alleged Pullman deviated from its System

of Accounts. Accordingly, judgment on Count III of the

counterclaims is entered against the counterplaintiffs and in

favor of Pullman.

CosTs.

Both parties have asked for assessment of costs. Rule 54(c)

provides that costs shall be allowed to the prevailing party

unless the court otherwise directs.

Under the circumstances, the Court finds it appropriate and

directs that the parties shall compute their total chargeable

costs and that these shall be allowed to the parties in the same

proportion as their individual recoveries bear to the total of

all of the judgments. These computations shall be submitted

to the Court within sixty (60) days of the date hereof.

It Is So ORDERED.

ENTERED:

/s/ R. W. McLaren,

United States District Judge.

Dated: November 15, 1973.

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