Chicago, Milwaukee, St. Paul and Pacific R. Co., Matter of

• Citation: 799 F.2d 317
• Decision Date: 20 August 1986
• Docket Number: 85-2121,85-1683,Nos. 85-1554,s. 85-1554
• Parties: 123 L.R.R.M. (BNA) 2184, 55 USLW 2133 In the Matter of CHICAGO, MILWAUKEE, ST. PAUL AND PACIFIC RAILROAD COMPANY, Debtor, Appeals of RAILWAY LABOR EXECUTIVES' ASSOCIATION, C.M.C. Real Estate Corporation, Chicago, Milwaukee, St. Paul and Pacific Railroad Company, Seaboard System Railroad, Inc. SEABOARD SYSTEM RAILROAD, INC., and Railway Labor Executives' Association, Petitioners, v. UNITED STATES of America and Interstate Commerce Commission, Respondents. 85-2123, 85-1573 and 85-1953, 85-2122.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 317

799 F.2d 317

123 L.R.R.M. (BNA) 2184, 55 USLW 2133

In the Matter of CHICAGO, MILWAUKEE, ST. PAUL AND PACIFIC

RAILROAD COMPANY, Debtor,

Appeals of RAILWAY LABOR EXECUTIVES' ASSOCIATION, C.M.C.

Real Estate Corporation, Chicago, Milwaukee, St.

Paul and Pacific Railroad Company,

Seaboard System Railroad, Inc.

SEABOARD SYSTEM RAILROAD, INC., and Railway Labor

Executives' Association, Petitioners, v. UNITED STATES of America and Interstate Commerce Commission,

Respondents.

Nos. 85-1554, 85-1683, 85-2121 85-2123, 85-1573 and

85-1953, 85-2122.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 28, 1986.

Decided Aug. 20, 1986.

Rehearing and Rehearing En Banc Denied in No. 85-1683 Oct. 20, 1986.

John O'B. Clarke, Highsaw & Mahoney, John Will Ongman, Pepper Hamilton & Scheetz, Washington, D.C., for petitioners.

Marvin F. Metge, Gorham Metge Bowman & Hourigan, Daniel R. Murray, Jenner & Block, Chicago, Ill., Allen E. Kleinburd, Dept. of Justice, Charles A. Stark, I.C.C., Washington, D.C., for respondents.

Before WOOD, Jr., and EASTERBROOK, Circuit Judges, and BARKER, District Judge. ^*

EASTERBROOK, Circuit Judge.

The Soo Line R.R. bought the railroad operations of the bankrupt Chicago, Milwaukee, St. Paul & Pacific R.R. in February 1985 for $150 million plus the assumption of liabilities estimated at $420 million. The district court approved the Soo's bid even though the Chicago & North Western Transportation Co. (CNW) bid $360 million plus assumption of essentially the same liabilities, and even though the Interstate Commerce Commission had found both proposed acquisitions to be consistent with the public interest. The district court thought the Soo's bid preferable because the Soo planned to abandon less of the Milwaukee's track--abandonments that the district court thought might impair the country's military security.

The investors in the Milwaukee, not understanding why they should be required to contribute $210 million to the national defense, contend that the district court's approval of the sale "took" their property. They have asked the Claims Court, which under 28 U.S.C. Sec. 1491 has exclusive jurisdiction of money claims against the United States arising out of takings, for relief. They ask us to set aside a paragraph in the district court's order that approved a finding of the ICC that the Soo's bid was constitutionally adequate, a paragraph that will impair if not preclude their suit in the Claims Court.

The Railway Labor Executives' Association (RLEA) challenges the sale, too, but on different grounds: it says that the district court did not impose sufficient conditions for the preservation of employment of the Milwaukee's employees. The RLEA also asks us to set aside an order of the ICC declining to review the Milwaukee's final plan of reorganization. Finally, the Seaboard Line wants us to set aside the district court's decision (and an order of the ICC) to the extent they allow the Soo to operate trains over the Seaboard's line between Bedford and New Albany, Indiana. These trackage rights enable the Soo to haul traffic from Chicago to Louisville, traffic the Seaboard otherwise might move.

Because the challenges to the sale are so disparate, we treat the facts pertinent to each challenge separately. Part I addresses the investors' constitutional argument, Part II the RLEA's arguments about protective conditions, and Part III the Seaboard's request to reclaim control of its track.

I

A

The Trustee of the Milwaukee managed its business for several years, paring unprofitable operations and refurbishing deteriorating track. The ICC and the reorganization court decided that the Milwaukee would not be a successful line if operated alone, so the Trustee put its railroad lines and related rail assets up for bids. Three bidders remained at the end: the Soo Line, the Grand Trunk, and the CNW. The ICC, whose approval was required under Sec. 5(b) of the Milwaukee Railroad Restructuring Act, 45 U.S.C. Sec. 904(b), and the Interstate Commerce Act, 49 U.S.C. Sec. 11344, rejected the Grand Trunk's proposal. Chicago, Milwaukee, St. Paul & Pacific R.R.--Reorganization, Fin.Dkt. No. 28640, --- I.C.C.2d --- (Sept. 26, 1984). In the same decision the ICC expressed concern that the CNW's proposal would eliminate some competition (the Milwaukee competed with the CNW in many markets), while acquisition by the Soo would have a smaller competitive effect. It therefore proposed conditions that would have required the CNW to grant trackage rights, allowing other railroads to operate over its lines to furnish competing service. Chairman Taylor and Vice Chairman Andre approved the Soo's proposal but did not state their reasons (except to the extent they may be inferred from the ICC's exceedingly lengthy analysis of all the proposals). Commissioner Gradison favored the Soo's proposal only because it required fewer conditions; she thought the public benefits of the two proposals were otherwise equal. Commissioner Sterrett favored the CNW's proposal. The ICC "approved" only the Soo's proposal but noted that its failure to disapprove the CNW's left the reorganization court with the discretion to choose either.

One of the issues before the ICC was the adequacy of the consideration offered by the bidders. Both Soo and CNW offered some $150 million in addition to the assumption of debts. Chicago Milwaukee Corporation (since renamed CMC Real Estate Corp.), the entity that was to emerge with the Milwaukee's non-rail assets and the net payment from the winning bidder (and thus the representative of the Milwaukee's equity investors), objected that $150 million was too little. The net value of the railroad assets was at least $360 million, according to CMC. The ICC rejected the CMC's position for two reasons: first, the $360 million valuation was the result of discounting to present value an assumed flow of future earnings, a methodology the Commission thought unreliable; second, the value did not represent any actual bid that CMC was willing to accept. The ICC instead decided to value the Milwaukee's rail assets by looking for a multiple of current earnings. A bid of $150 million represented a multiple of 16.9 times the Milwaukee's current earnings and eight times its projected earnings for 1984. The multiple of 16.9 was almost twice the average of five large carriers reflected in stock market valuations in 1983. CMC's asking price of $360 million, more than 40 times current earnings, struck the ICC as unrealistic.

CNW then met CMC's "unrealistic" demand, offering $360 million (in addition to the assumption of more than $420 million in liabilities) for the Milwaukee's rail operations. CMC and the Trustee declared they were satisfied. The ICC considered this revised bid, reopened the former decision (which had suspended judgment on the CNW's proposal) and formally approved CNW's bid. --- I.C.C.2d --- (Jan. 8, 1985). It concluded that CNW could realize operational savings of $123 million without abandoning any lines. But by a vote of 4-3 the ICC again favored the acquisition by the Soo. The majority (Chairman Taylor and Commissioners Simmons, Lamboley, and Strenio) concluded that the Soo's bid, though $210 million less than the CNW's, remained fair and constitutionally adequate because it exceeded the net liquidation value of the Milwaukee's rail properties and the average price-earnings multiple of other railroads. The majority was divided, with Chairman Taylor and Commissioner Simmons voting to disapprove the CNW's bid, largely on the ground that acquisition by the Soo would create new competition while acquisition by CNW would not and, without the use of conditions and trackage rights, would reduce competition. Commissioner Strenio, on the other hand, thought the matter "extremely close" and explained that he favored the acquisition by Soo because it "calls for more head-to-head competition between rail carriers". Commissioner Gradison favored the CNW's proposal because of its higher price, raising doubts that the Soo's could be called "fair" to CMC. Vice Chairman Andre and Commissioner Sterrett, although favoring CNW's bid, did not explain their positions.

The reorganization court spoke next, approving the Soo's bid despite the request by the Trustee and CMC that it sell to the CNW. The judge did not write an opinion explaining why. His oral remarks state that he was concerned that CNW planned to file with the ICC an application to abandon as much as 1,100 miles of track if they should prove unprofitable. (CNW had not asked for permission to abandon any particular track, and any concrete proposals would have triggered their own proceedings.) The district court objected to the potential abandonment on several grounds.

Now, what is the matter with abandonment? Well, for one thing it costs jobs. People are going to be out of work that were working on the abandoned transportation system or routes. Another consideration that hasn't been, really, considered very much but was mentioned by one of the Commissioners ... is the matter of national security.

....

... I would say once a railroad is abandoned once a piece of trackage is pulled up and the land sold it isn't going to be replaced. It is almost irresponsible under the international situation that we are faced with today to tear up pieces of a railroad system, which is probably the best in the world, for no better reason than a few million dollars in the bidding price.

I must say that I think that national security is a very important consideration for keeping an extensive and more viable system of transportation....

A few hundred million here and a few hundred million there, and we may be talking real money. (Apologies to Everett Dirksen.) But the Department of Defense had not expressed the view that abandonment of track is contrary to interests of national security, and Congress recently made it easier to abandon unprofitable track. See Hayfield...