In re Central Railroad Company of New Jersey

• Decision Date: 27 August 1973
• Docket Number: No. 73-1006 and 73-1027.,73-1006 and 73-1027.
• Citation: 485 F.2d 208
• Parties: In the Matter of The CENTRAL RAILROAD COMPANY OF NEW JERSEY, Debtor. Appeal of STATE OF NEW JERSEY, No. 73-1006. Appeal of COMMONWEALTH OF PENNSYLVANIA and Pennsylvania Public Utility Commission, No. 73-1027.
• Court: U.S. Court of Appeals — Third Circuit

485 F.2d 208 (1973)

In the Matter of The CENTRAL RAILROAD COMPANY OF NEW JERSEY, Debtor.

Appeal of STATE OF NEW JERSEY, No. 73-1006.

Appeal of COMMONWEALTH OF PENNSYLVANIA and Pennsylvania Public Utility Commission, No. 73-1027.

Nos. 73-1006 and 73-1027.

United States Court of Appeals, Third Circuit.

Argued March 1, 1973.

Reargued May 23, 1973.

Decided August 27, 1973.

Certiorari Denied January 7, 1974.

Stephen Skillman, Asst. Atty. Gen., Trenton, N. J., for appellant in No. 73-1006.

Gordon P. MacDougall, Sp. Asst. Atty. Gen., Washington, D. C., for appellants in No. 73-1027.

Jacob I. Goodstein, Goodstein, Zamore, Mehlman & Krones, New York City, for 3¼% Mortgage Bondholders Protective Committee.

Roger C. Ward, Pitney, Hardin & Kipp, Newark, N. J., for Manufacturers Hanover Trust Co., indenture trustee.

Stanley Weiss, Carpenter, Bennett & Morrissey, Newark, N. J., for trustee of Central R. R. Co. of N. J.

Before SEITZ, C. J., and VAN DUSEN, ALDISERT, ADAMS, GIBBONS, ROSENN, JAMES HUNTER, III and WEIS, Circuit Judges.

Certiorari Denied January 7, 1974. See 94 S.Ct. 870.

ADAMS, Circuit Judge:

May a district judge presiding over a railroad reorganization, pursuant to Section 77 of the Bankruptcy Act,¹ permit the Trustees of the railroad to discontinue a loss-producing service or must he withhold his authorization until the Trustees have applied to federal or state regulatory agencies for permission to terminate the service?

The State of New Jersey answers that permitting the discontinuance before administrative review would thwart any attempt to create a viable rail system essential to the economic life of the region. The Trustees of the Central R. Co. of New Jersey, by way of rejoinder, assert that denying the request for discontinuance could result in an unconstitutional taking of property. Resolution of this appeal requires this Court to address these contentions.

I.

The Central Railroad of New Jersey (Central) is one of the many railroads² in the Northeast that is presently undergoing reorganization pursuant to section 77 of the Bankruptcy Act. The Central's lines, prior to entry into reorganization, extended from the Newark-Jersey City area in Northeastern New Jersey west to the northeast corner of Pennsylvania³ (the "hard coal region") and south to Southern New Jersey, ending near the Delaware Bay.

The majority of the customers served by the Central are located in the Northern New Jersey metropolitan area. In that region, the Central provides shipping services for industry and, more significantly for this appeal, carries approximately 25,000-30,000 riders a day.⁴ The vast majority of these riders are commuters who use the train to travel from western and southern suburbs into Newark or Jersey City. Many of these commuters continue to New York, using other public transportation facilities.

The State of New Jersey has for a number of years provided subsidies to the several railroads that transport commuters in New Jersey. Since the entry of the Central into reorganization in March, 1967, that railroad has received annual subsidies from the state ranging from a high of $5,100,000 in 1972 to a low of $4,400,000 in 1970. The granting of the subsidy has been made pursuant to contracts entered into between the railroad and the state acting through its Commuter Operating Agency. Many of the terms of the contracts are prescribed by statute. In July of 1972, the railroad and the state contracted for the Central to continue to furnish passenger service through June 30, 1973. The railroad was obligated to run trains according to an agreed upon schedule and compensation was to be paid by the state on the basis of the railroad's "avoidable loss" for the preceding year.⁵ Article Seventeenth of the contract provided:

"Each party reserves the right to cancel this agreement at the end of any calendar month upon 30 day\'s notice to the other party."⁶

Alleging that the subsidy paid by the state was inadequate to compensate the railroad, the Trustees petitioned the reorganization court for permission to exercise their right of cancellation under the contract and to terminate all their passenger services in New Jersey.

The district court, in an order dated December 20, 1972,⁷ based on an oral opinion delivered earlier,⁸ granted the Trustees' petition, and ordered termination of all passenger service as of January 21, 1973. The district court's order was appealed to this Court and a panel of the Court relying on a brief per curiam opinion permitting suspension of the Central's Pennsylvania operations,⁹ affirmed the decision of the district court.

The State of New Jersey and the Commonwealth of Pennsylvania¹⁰ filed petitions for rehearing before the Court En Banc. The petitions were granted and argument before the Court En Banc was had on May 23, 1973.^10a The termination of passenger service has been stayed pending resolution of this appeal.¹¹ Such resolution is now incumbent upon us.

II.

The Trustees first contend that we must affirm the district court because the Court is bound by the doctrines of "law of the case" and stare decisis to follow its earlier decision permitting the suspension of service in Pennsylvania.¹² This contention is without merit, for it has long been the rule in this Circuit that decisions made in similar cases¹³ by panels of this Court are binding on other panels but are not controlling on the Court En Banc. Indeed, it is only through the Court En Banc that precedents established by earlier panel decisions may be reexamined.¹⁴

In addition, the Pennsylvania case is distinguishable from this appeal. The former decision authorized suspension of certain passenger services pending ICC action on applications for abandonment of such service, which action was arguably unduly delayed. In the present case, however, the Trustees have not filed applications with either the ICC or state regulatory authorities.

III.

A review of the earlier decision must begin with an examination of the railroad reorganization statute and proceed to an explication of the relationship between administrative agencies and a district court supervising a railroad reorganization under that statute.

The decision to permit termination was made by the district court in December, 1972. At that time, the Trustees had not sought approval for the termination of passenger service in any forum other than the district court. No action had been commenced before the New Jersey regulatory agencies; no abandonment proceedings had been initiated before the Interstate Commerce Commission.¹⁵

A termination of passenger service is an action that may not fall squarely within the ambit of statutes which control abandonments of railroad lines or portions thereof.¹⁶ However, whether the termination is or is not denominated an abandonment, prior administrative approval appears mandated before a district court overseeing a reorganization may permit the discontinuance of an important component of a region's rail service.^16a

Section 77(o) provides that the district court may permit abandonment of "lines or portions of lines of railroad." It states in pertinent part:

"(o) The trustee or trustees, from time to time, shall determine what lines or portions of lines of railroad and what other property of the debtor, if any, should be abandoned or sold during the pendency of the proceedings in the interest of the debtor\'s estate and of ultimate reorganization but without unduly or adversely affecting the public interest, and shall present to the judge petitions, in which other parties in interest may join, for authority to abandon or to sell any such property; and upon order of the judge made after a hearing pursuant to such reasonable notice by publication or otherwise as the judge may direct to parties in interest, authorizing any such abandonment or sale, but only with the approval and authorization of the Commission when required by chapter 1 of Title 49, as amended February 28, 1920, or as it may be hereafter amended. . . ."¹⁷

As section 77(o) makes clear, if the railroad is subject to the jurisdiction of the ICC, no abandonment may take place without the approval of that agency.¹⁸

If the termination of passenger service is not denominated an abandonment, or if the Central's service is not subject to the purview of the ICC,¹⁹ the requirement of ICC approval mandated by section 77(o) would appear not to apply. Nonetheless, the district court may not be free to permit termination without prior administrative approval.

New Jersey has developed its own administrative agencies that regulate the conduct of certain railroads within the state. Approval of the appropriate agency is required under New Jersey law before any service may be discontinued.²⁰ If the approval of the state agency is withheld or unduly delayed, under a special provision recourse may be had to the ICC.²¹

The Supreme Court has explicitly stated that compliance with a state's regulatory program is required of railroads undergoing reorganization.

Palmer v. Massachusetts²² involved an attempt by the Trustees of the New Haven Railroad to terminate passenger service to eighty-eight stations in the Boston region. To effectuate such a termination, the Trustees, as required by state law, began proceedings before the Massachusetts Department of Public Utilities. While the state hearings were being conducted, the Trustees applied to the district judge supervising the reorganization for permission to carry out the same terminations. The district court, "ruled that § 77 gave him the responsibility of disposing of the petition on its merits and, having taken evidence, gave the very relief for which the Trustees had applied to the Department and which was still in process of orderly consideration."²³ The U.S. Court of Appeals for the Second Circuit reversed,²⁴ and the Supreme Court affirmed that reversal.

In holding that the district court supervising the reorganization did not...