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

• Decision Date: 17 August 1987
• Docket Number: 85-3140,Nos. 85-2518,s. 85-2518
• Citation: 827 F.2d 112
• Parties: 126 L.R.R.M. (BNA) 2348 In The Matter of CHICAGO, MILWAUKEE, ST. PAUL and PACIFIC RAILROAD COMPANY, Debtor. APPEALS of RAILWAY LABOR EXECUTIVES' ASSOCIATION.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 112

827 F.2d 112

126 L.R.R.M. (BNA) 2348

In The Matter of CHICAGO, MILWAUKEE, ST. PAUL and PACIFIC

RAILROAD COMPANY, Debtor.

APPEALS of RAILWAY LABOR EXECUTIVES' ASSOCIATION.

Nos. 85-2518, 85-3140.

United States Court of Appeals, Seventh Circuit.

Argued April 15, 1987.

Decided Aug. 17, 1987.

John O'B Clarke, Jr., Highsaw & Mohoney, Washington, D.C., for appellant.

Daniel R. Murray, Jenner & Block, Chicago, Ill., for appellee.

Bruce C. Spitzer, Gorham, Metge, Bowman & Hourigan, Chicago, Ill., for Soo Line R.R. Co.

Before WOOD and RIPPLE, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.

RIPPLE, Circuit Judge.

In this appeal, the Railway Labor Executives' Association (RLEA) challenges Order Nos. 832 ¹ and 866 ² entered by the district court in the ongoing bankruptcy proceeding of the Chicago, Milwaukee, St. Paul & Pacific Railroad Company (debtor or Milwaukee Road). Order No. 832 confirmed the final plan of reorganization submitted by the trustee of the debtor. Order No. 866 set a consummation date for the discharge of the debtor and the trustee and for the dissolution of the estate. In essence, RLEA claims that Order No. 832 should be set aside because the plan of reorganization approved in that order failed to provide for claims of RLEA members made pursuant to a wage deferral agreement entered into by RLEA and the debtor. RLEA further argues that, because the order affirming the plan was improper, the order setting a date for the consummation of the plan was improper. We find these claims to have no merit. Accordingly, we affirm the orders of the district court.

I

A detailed factual rendition of this long, complicated proceeding would unduly burden the length of this opinion. Therefore, we shall limit the following presentation to those events necessary to the issues before us in this appeal.

A. Background

On December 19, 1977, the Milwaukee Road filed a petition for reorganization pursuant to section 77 of the Bankruptcy Act, 11 U.S.C. Sec. 205. ³ Although the railroad was suffering substantial financial losses at the time, the reorganization court initially ordered it to continue its operations. In November 1979, with permission of the court, the trustee suspended operations over more than half of the Milwaukee Road system. However, during the same month, Congress enacted the Milwaukee Railroad Restructuring Act (MRRA or Restructuring Act) which provided that the entire railroad should be operated until the Interstate Commerce Commission (ICC) determined whether the Milwaukee Road could be reorganized. See 45 U.S.C. Secs. 901-922.

After the ICC determined, in early 1980, that the existing plan of reorganization was not feasible, the trustee obtained orders allowing the abandonment of approximately two-thirds of the Milwaukee Road's system.

B. The Wage Deferral Agreement

In August 1980, the trustee entered into an agreement with most of RLEA's member organizations (these organizations represented Milwaukee Road employees) whereby 10% of those employees' wages were deferred between August 1, 1980 and January 1, 1981, and 7% of their wages were deferred for the year 1981. Appellant's App.F at 1. The agreement, the pertinent text of which is set forth in the footnote, ⁴ provided that, if the railroad were reorganized, the employees would receive preferred or preference stock in the reorganized successor to the Milwaukee Road. The agreement further provided that each employee would receive an amount of stock equal to 1.3 times the amount of wages deferred for the years 1980 and 1981, as well as 1.2 times the amount deferred in 1982, and 1.1 times the amount deferred in 1983 (should the agreement be extended to those years). Id. at 3, p 6(a). Finally, the agreement also provided that, if the railroad were not reorganized, but instead its rail assets were liquidated, the employees would have claims in the amount of their deferred compensation and that those claims would have the same status as costs of administration. Id. at 3-4, p 6(b). The reorganization court approved the wage deferral agreement in Order No. 397. Matter of Chicago, Milwaukee, St. Paul & Pac. R.R., No. 77 B 8999 (N.D.Ill. Sept. 8, 1980); Appellant's App.G.

C. The Trustee's Plan of Reorganization and the Various Offers to Purchase the "Core Assets"

The trustee and other third parties interested in purchasing the Debtor's "core assets" ⁵ then submitted plans of reorganization to the reorganization court.

1. The GTC's Plan

In March 1983, the trustee filed an amended plan of reorganization. This new plan contemplated reorganizing the core assets of the Milwaukee Road separately from its other assets. In the March 1983 plan, the trustee proposed that, once this reorganization took place, the Grand Trunk Corporation (GTC) would acquire the stock of the Milwaukee Road. This plan proposed to satisfy the wage deferral claims through the issuance of preferred stock.

2. The CNW and Soo Plans

Shortly after the GTC plan was filed with the ICC, two other railroads, the Chicago & Northwestern Transportation Company (CNW) and the Soo Line Railroad Company (Soo), filed applications to purchase the Milwaukee Road's operating rail assets. Both the CNW plan and the Soo plan differed from the GTC plan. Rather than providing for the acquisition of the stock of the reorganized Milwaukee Road by the purchaser, these plans proposed, through asset purchase agreements (APAs), that the purchaser would create a subsidiary that would purchase the core assets of the Milwaukee Road. As originally submitted, these plans proposed to satisfy the wage deferral claims through the issuance of preferred stock, just as the GTC plan had. Later, however, both the CNW and the Soo submitted amended plans in which they proposed to satisfy the wage deferral claims with cash payments if possible (with payment being at face value of the wage deferral claims). If cash repayments were not possible, these amended plans provided that the claims would be satisfied through the issuance of preferred stock. ⁶

D. Initial ICC Scrutiny of the Reorganization Plans

The reorganization court transmitted the various reorganization plans to the ICC as required by the MRRA. In its first order, the ICC approved the Soo's plan, including the proposal to satisfy the Wage Deferral Agreement claims in cash rather than preferred stock. The ICC therefore certified the Soo plan to the reorganization court. At this time, the ICC took no action on the CNW's plan and rejected the GTC's plan.

After the ICC approved the plan of reorganization submitted by the Soo, the CNW raised its bid by approximately $210 million. The trustee then sought permission to seek ICC approval of the revised CNW plan. The reorganization court granted this request. It returned both the Soo and the CNW plan to the ICC and asked that the ICC state a preference for either the Soo or the CNW plan.

E. The Application of the Trustee to the Reorganization Court to Settle the Wage Deferral Claims

On November 28, 1984--while the Soo and CNW plans were still pending before the ICC--the trustee sought the permission of the reorganization court to settle the wage deferral claims in accordance with the terms contained in the APAs of both the Soo and the CNW. The trustee told the court that this action was taken to permit the employees to enjoy favorable tax treatment if the funds were received in 1984. He argued that the proposals before the ICC (one of which would presumably be effectuated) constituted a liquidation, not a reorganization, of the Milwaukee Road's assets. Therefore, he maintained cash payments, rather than stock, were appropriate. However, because the sale of the core assets was not yet final, the trustee suggested that the employees be offered the choice of a present cash payment or deferring decision until the sale of the assets and a determination of their entitlement to preferred stock.

On December 10, 1984, the reorganization court entered Order No. 789 which authorized the trustee to offer the employees cash payments in the actual amount of the deferred wages in full satisfaction of his obligation under the Wage Deferral Agreement. Matter of Chicago, Milwaukee, St. Paul & Pac. R.R., No. 77 B 8999 (N.D.Ill. Dec. 10, 1984); Appellees' App.A, Ex. A. The vast majority of the employees accepted this offer by the end of the calendar year. ⁷

F. The Second ICC Decision

On January 11, 1985, the ICC delivered its second decision. The agency reaffirmed its approval of the Soo proposal. It also conditionally approved the CNW proposal, ⁸ and, by a 4-3 vote, expressed, in reply to the request of the reorganization court, a preference for the Soo plan.

G. Sale of the Core Assets by the Reorganization Court

In February 1985, the reorganization court considered the sale of the Milwaukee Road's core assets to either the Soo or the CNW. The court focused only on the APAs, rather than considering them as part of any comprehensive reorganization plan. On February 19, 1985, in Order No. 809, the reorganization court approved the Soo's proposed purchase of the core assets of the Milwaukee Road. Matter of Chicago, Milwaukee, St. Paul & Pac. R.R., No. 77 B 8999 (N.D.Ill. Feb. 19, 1985); Appellant's App.B [hereinafter cited as Order No. 809]. The sale closed the next day after several creditors had unsuccessfully sought to stay the order in both the reorganization court and in this court.

Under the terms of the Soo's APA, the Soo assumed all of the Milwaukee Road's obligations under the Wage Deferral Agreement. As noted earlier, the Soo intended to repay the wage deferral claims in cash in the amount of wages actually deferred. If cash payments were not possible, the Soo proposed repayment through preferred stock.

H. The ICC Terminates Continuing Jurisdiction

On March 8, 1985, the trustee filed a petition requesting that the ICC state whether its approval of the final plan of reorganization was subject to the agency's...