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IN RE NEW YORK

November 18, 1980

In the Matter of The NEW YORK, SUSQUEHANNA & WESTERN RAILROAD COMPANY


The opinion of the court was delivered by: WHIPPLE

TO ALL COUNSEL OF RECORD:

Presently pending before this Court is the Second Amended Plan of Reorganization (the "Plan") for the New York, Susquehanna & Western Railroad Company ("NYS&W"). While a determination as to approval or disapproval of the Plan shall not be made by this Court until a report on the Plan is received from the I.C.C. *fn1" , one important issue pertaining to the Plan is ripe for adjudication at this time. This issue is the question of whether or not this Court must impose certain labor protection provisions in this case, either through a requirement that the Plan include such provisions, or otherwise. According to the Milwaukee Railroad Restructuring Act, 45 U.S.C. 901, 915, determination of the labor protection issue is within the province of the Court, and not the I.C.C. See also New York, S. & W.R. Co. Abandonment, Docket No. B-210 (Sub. No. 1) (Aug. 12, 1980); In re Chicago, Rock Island & Pacific R. Co., No. 75-B-2697 (N.D.Ill., June 2, 1980).

In such a situation, the imposition of labor protection provisions may be discretionary or mandatory and may depend upon the specific circumstances of the given case.

 Accordingly, the two questions to be addressed are:

 
2. If the disposition is an abandonment, must labor protection provisions be imposed?

 Abandonment vs. Sale or Transfer

 In order to put the analysis of the disposition of the assets of NYS&W into perspective, a brief summary of recent events in this reorganization is required.

 In July 1979, this Court determined that the creditors had suffered an unconstitutional taking of their property, and that the debtor was not reorganizable. This Court thereafter ordered the Trustee to cease railroad operations and to commence an orderly liquidation of its assets. (July 12, 1979 Opinion and Order No. 81). In August, 1979, this Court modified Order No. 81, directing the Trustee to file with the Interstate Commerce Commission ("ICC") and the New Jersey Department of Transportation ("NJDOT") "all appropriate applications and supporting documents necessary to bring before those agencies the termination and abandonment of the entire operation of the debtor." (August 24, 1979 Opinion and Order 83). The ICC and NJDOT were further ordered to submit reports to this Court on the Trustee's applications. Orders 81 and 83 were affirmed by the United States Court of Appeals for the Third Circuit on September 30, 1980. In the matter of New York, Susquehanna & Western Railroad Co., 633 F.2d 210 (3d Cir. 1980).

 In an effort to conform to the District Court's order, the Trustee petitioned the ICC under 49 U.S.C. § 10505 for exemption from certain procedural requirements. On November 4, 1979, the Milwaukee Railroad Restructuring Act, P.L. 96-101, 93 Stat. 736, 45 U.S.C. 901 et seq. ("Milwaukee Act") became law. The effect of the passage of the Milwaukee Act was to cause the ICC to dismiss as moot the Trustee's application for exemption. ICC Decision, Walter G. Scott, Trustee-Exemption Under 49 U.S.C. 10505, Docket No. AB-210 (Nov. 29, 1979) (hereinafter "Trustee's Exemption"). The ICC held that "NYSW meets the criteria of ... (Section 17(a) of the Milwaukee Act) ... the Bankruptcy Judge may approve abandonment regardless of Commission action." Trustee's Exemption.

 The Trustee thereafter resubmitted materials to the ICC, and on August 12, 1980, that agency filed a report and recommendation with this Court. In that document, the ICC recommended that the Trustee should be permitted to abandon the debtor's entire line. New York Susquehanna and Western Railroad Company-Abandonment, Docket No. AB-210 (Sub. No. 1) (service date August 12, 1980) (hereinafter "NYS&W Abandonment ").

 Consistent with New Jersey's regulatory process, a hearing was held before the Administrative Law Judge on the Trustee's application to discontinue operations and abandon the line. In her Initial Decision, which was adopted as the Final Decision of the NJDOT on August 27, 1980, Judge Sybil Moses ordered that the Trustee's application to discontinue and abandon operations be granted.

 The debtor has been operating at a loss since it went into reorganization in January 1976. NYS&W Abandonment, at 2. This Court has repeatedly concluded that there is no possibility that the debtor can continue to operate under present conditions, given the deterioration of its physical plant, and its untenable financial position.

 On March 21, 1979 the Department of Transportation completed an analysis of the costs of upgrading the Railroad's tract to FRA Class 2 standards. The Department of Transportation estimated the costs of upgrading the debtor Railroad track (not including the cost of reconstruction of bridges and grade crossings) to be approximately $ 1,700,000.00.

 Three separate engineering surveys, commissioned by the Department of Transportation, estimated the costs of rehabilitation of the three most deteriorated bridges on the Debtor Railroad's Line at $ 1,497,000.00, subject to operating changes which would cause the need for such repairs to be diminished. The Debtor does not have funds for these projects, nor has it shown the ability to generate them.

 The debtor began the year 1980 employing 59 people. (Transcript September 23, 1980, at 71). However, car loadings, the source of the Railroad's revenue, have shown an alarming rate of decline. In the first half of 1980, car loadings fell 21.7 percent over the corresponding figure for the first half of 1979. (Trustee's Petition filed August 22, 1980). More importantly, the debtor showed an $ 83,598.00 loss in the first quarter of 1980. (Financial statement annexed to Trustee's August 22, 1980 Petition). Total railway operating revenue was $ 507,455.00 for the first quarter of 1980; if this figure is annualized, the railroad could be expected to gross only $ 2,029,816.00 from operations in 1980.

 With these negative financial factors at work, and consistent with the earlier mandate of this Court in Orders 81 and 83, the Trustee undertook the liquidation of the debtor. Efforts by the Trustee and the NJDOT produced bids for assets of the Debtor in various forms. After hearings and careful consideration, this Court found the bid of the Delaware Otsego Corporation ("DO") to be the most favorable offer as far as the estate and its creditors are concerned.

 On August 5, 1980, this Court entered Order 104, which approved the contract between the Trustee, the offeror, DO, and its new subsidiary, the New York Susquehanna & Western Railway Corporation ("New NYS&W"). That agreement provides in pertinent part that the New NYS&W would purchase from the Trustee certain of the debtor's abandoned rail assets which were being liquidated. New NYS&W was incorporated on March 17, 1980, and prior to its takeover of the debtor's line of September 2, 1980, New NYS&W had never operated as a carrier. (August 1, 1980 Agreement of Sale, P VI(B), Exhibit A to Trustee's Petition for Approval of Contract filed August 1, 1980) (hereinafter "Agreement").

 One of the conditions precedent to closing under the Agreement is the receipt of final judicial and regulatory approval of the transaction, without conditions materially increasing the cost of the transaction to DO and New NYS& W. This term includes specifically any conditions requiring DO or New NYS&W to make any payment to any employees of Susquehanna, DO or New NYS&W other than those specified in the Agreement. Agreement, paragraph X(b).

 Based upon the foregoing facts and the legal analysis which follows, the conclusion is inescapable that the transaction before the Court constitutes a complete abandonment of the debtor's rail line and a total termination of service. This course was ordered by this Court long before any entity manifested to this Court an interest in obtaining operating control of any portion of the debtor's line. This transaction does not constitute a "sale or transfer" within the meaning of any applicable statute or regulation. The Trustee does not simply "abandon his abandonments," see In re Chicago, Milwaukee, S.P. & P.R. Co., No. 77-B-8999 (N.D.Ill., filed 2/29/80); he is under a fiduciary duty to reduce to money the property of the estate, for distribution to creditors. Hence, this abandonment is followed by, and is part of, a liquidation of the debtor, it is not a sale or transfer. The Trustee is bound to abandon this line and to terminate all service regardless of whether the transaction with the new carrier is accomplished. That the liquidation of this estate may involve the conveyance of a portion of the debtor's assets to a single entity which will attempt to provide rail services does not negate the fact that in July and August 1979, this Court adjudicated the debtor unreorganizable and ordered cessation of operations and liquidation. Authority to effectuate abandonment of operations and cessation of service was bound to be pursued by the Trustee whether the assets were sold piecemeal or in bulk. The Trustee's sale to the New NYS&W does not transmute into a sale or transfer the proceedings leading to the issuance of authority to abandon.

 This case clearly involves the total abandonment of the debtor's rail service by the Trustee. "Discontinuance of operations by the Trustee is abandonment", Smith v. Hoboken Railroad, W. & S.C., 328 U.S. 123, 130, 66 S. Ct. 947, 949, 90 L. Ed. 1123 (1946), which "unlike an embargo, is characterized by an intention of the carrier to cease permanently or indefinitely all transportation service on the relevant line." ICC v. Chicago & Northwestern Transportation Co., 533 F.2d 1025, 1028 (8th Cir. 1976); ICC v. Chicago, Rock Island & Pacific Railway Company, 501 F.2d 908 (8th Cir. 1974), cert. denied, 420 U.S. 972, 95 S. Ct. 1393, 43 L. Ed. 2d 652 (1975).

 Thus, in the context of this proceeding, the orders entered herein and the steps taken to dispose of the property of the estate in an orderly liquidation, it is clear that an abandonment procedure has been followed and not a sale or transfer. Insofar as the total abandonment procedure is incorporated in the Plan, this Court hereby approves and authorized such abandonment of the estate's properties.

 Mandatory vs. Discretionary Labor Protection

 We turn now to consideration of the labor protection issue in an abandonment setting. The financial condition of the debtor has worsened, with one important exception, throughout the course of these proceedings. In mid-1979, in an effort to arrest the decline, and to attempt to formulate an income-based plan of reorganization, NJDOT hired the railroad consulting firm of L.E. Peabody and Associates (hereinafter "Peabody"). Peabody submitted a number of reports to this Court, portions of which have particular relevance to the issues before this Court at this juncture. These reports, the Trustee's attempts to implement the recommendations contained therein, and the results of the Trustee's efforts, establish that the financial problems of this Railroad are based in large part on the fact that the Trustee has been compelled to operate in accordance with certain collective bargaining agreements which provide for uneconomical staffing of the Railroad.

 In its June 18, 1979 report on Institutional Alternatives to Service, Peabody analyzed the debtor's manning requirements, and concluded that, as of May 9, 1979, the debtor was significantly overstaffed. (Page 9). Peabody recommended ...


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