Illinois Central Railroad Company v. United States

Citation263 F. Supp. 421
Decision Date09 January 1967
Docket NumberNo. 65 C 1393.,65 C 1393.
CourtUnited States District Courts. 7th Circuit. United States District Court (Northern District of Illinois)
PartiesILLINOIS CENTRAL RAILROAD COMPANY, Monon Railroad and St. Louis Southwestern Ry., Plaintiff and Intervening Plaintiffs, v. UNITED STATES of America, Interstate Commerce Commission, Missouri Pacific Railroad Company, Chicago & Eastern Illinois Railroad, Louisville and Nashville Railroad Company and Leon Leighton, Defendants and Intervening Defendants.

William J. O'Brien, Jr., Chicago, Ill., for Illinois Central R. R.

Fritz R. Kahn, Washington, D. C., for Interstate Commerce Commission.

Edward V. Hanrahan, U. S. Atty., Chicago, Ill., Thurgood Marshall, Sol. Gen., Washington, D. C., for the United States.

James W. Hoeland, Lousiville, Ky., Harry R. Begley, Chicago, Ill., for Louisville & Nashville R. R.

Leon Leighton, New York City, pro se.

Albert E. Jenner, Jr., Thomas P. Sullivan and John C. Tucker, Chicago, Ill., William R. McDowell, Dallas, Tex., M. M. Hennelly and Gilbert P. Strelinger, St. Louis, Mo., Donald J. O'Brien, Jr., Chicago, Ill., for Missouri Pacific R. R.

John B. Goodrich, James H. Hawk, Robert Thorsen, Chicago, Ill., for Monon R. R.

W. McNeil Kennedy and Herbert S. Wander, Chicago, Ill., for Chicago & Eastern Illinois R. R.

Nuel D. Belnap, Richard M. Freeman and Daniel J. Sweeney, Chicago, Ill., for St. Louis Southwestern Ry.

Before SCHNACKENBERG, Circuit Judge, CAMPBELL, Chief District Judge, and DECKER, District Judge.

Judgment Affirmed January 9, 1967. See 87 S.Ct. 612.

DECKER, District Judge.

Illinois Central Railroad ("IC") brings this suit to set aside an order of the Interstate Commerce Commission ("Commission"). Pursuant to 28 U.S.C. §§ 2284 and 2321-2325 the matter was tried before a three-judge court. The order, under § 5(2) of the Interstate Commerce Act, 49 U.S.C. § 5(2), authorized the Missouri Pacific Railroad ("MoPac") to acquire control of the Chicago & Eastern Illinois Railroad ("Eastern"), with the condition that Eastern then negotiate to sell to the Louisville & Nashville Railroad ("L&N") the Eastern Evansville line. The St. Louis Southwestern Ry. ("Cotton Belt") intervenes as a plaintiff; MoPac, Eastern and a stockholder of Eastern intervene as defendants. In addition, the Monon Railroad and L&N intervene as a plaintiff and a defendant, respectively, to argue that portion of the Commission's order dealing with the sale of the Evansville line.

Eastern is a comparatively short, bridge and terminal railroad running south from Chicago to East St. Louis and Thebes, Illinois, on the west, and to Evansville, Indiana, on the east. On a map its routes roughly resemble an inverted letter "Y." Its lines are in an "end-to-end" relationship with the lines of MoPac and L&N, neither of which now has access to the Chicago gateway over its own track. Eastern's lines are in a "side-by-side" relationship with the lines of IC, and if Eastern's lines are included in the MoPac and L&N systems, these two large railroads can for the first time compete with IC for substantial long line traffic over tracks entirely controlled by them.

In 1962, when the record in this case was made before a hearing examiner, Eastern was in serious financial difficulty. The examiner found that "practically every principal party in the proceedings herein predicates its individual interests upon convictions that Eastern's financial position is precariously weak, and that immediate substantial assistance is imperative to protect its ability to provide adequate transportation service."1 The Commission found that control of Eastern by a major long-line railroad which had an interest in preservation of Eastern and modernization of its facilities would be in the public interest. Eastern's future as well as the interests of shippers and the development of a sound national transportation system were found to be better served by an "end-to-end" affiliation with MoPac than by a "side-by-side" affiliation with IC, one of Eastern's competitors.

Although these proceedings concerned authority to gain control, MoPac had already acquired substantial quantities of Eastern securities when the control application was filed in 1961. At the time of the 1962 hearing, the examiner found that MoPac and its parent corporation, Mississippi River Fuel Corp., were beneficial owners of the following proportions of Eastern securities: 17.2% of the common stock, 31.42% of the class A stock and 8.29% of the Convertible 5% General Mortgage Income Bonds.2 Approval by two-thirds of the class A stock voted at a meeting was required for certain Eastern corporate actions (e. g., mergers, certain leases and certain sales of assets). Since less than 90% of that stock was voted at the typical Eastern meeting, MoPac had sufficient holdings to prevent the needed two-thirds majority support, and thereby veto proposed action.

Eight months after the major acquisition of Eastern securities, MoPac established an "Independent Voting Trust" into which all of the securities were placed, with instructions that "the trustee shall vote the securities of C&EI so that at all times * * * there shall, to the best of its knowledge, be entire independence of directors and management between MoPac and C&EI." Subsequent to the examiner's hearing, on February 20, 1964, MoPac acquired additional Eastern securities which were conveyed immediately to the trustee.

The Commission held that MoPac had illegally acquired some measure of control of Eastern by purchasing the class A stock and the veto power it carried without first obtaining Commission approval. Control of one railroad by another without Commission permission under § 5(2) is a violation of § 5(4) of the Interstate Commerce Act, 49 U.S.C. § 5(4); a common remedy is denial of the offending carrier's § 5(2) control application. However, MoPac's violation was held to have been comparatively minor and to have terminated upon creation of the trust eight months after the securities were acquired. The Commission held that control need not be denied in this case simply because of a § 5(4) violation in light of the great public benefit flowing from MoPac control of Eastern.

IC labels MoPac's § 5(4) violation flagrant rather than minor, and argues that the Commission made an error of law when it found the trust effective to insulate Eastern from MoPac control. IC claims that a proper evaluation of the seriousness of MoPac's violation in light of the legal inefficacy of the trust requires strict enforcement of § 5(4) and denial of MoPac's § 5(2) control application. While IC challenges the findings that shippers and the national transportation system will be served best by MoPac control, the primary thrust of the complaint is that the Commission acted arbitrarily on the basis of a mistake of law in holding MoPac's § 5(4) violation so trivial that the public interest required an award of control to MoPac rather than divestiture.

IC further argues that the Commission acted arbitrarily in refusing to reopen the record to receive evidence on two points: 1) alleged further MoPac § 5(4) violations; 2) Eastern's substantially improved financial condition since the 1962 hearing. IC claims that this case must, at the very least, be remanded to the Commission for further consideration in light of this proffered evidence.

Finally, the provision in the order for compulsory negotiations between Eastern and L&N for sale of the Evansville line is said to be beyond the Commission's legal power to enter.

We hold that the Commission did not err in finding the trust effective, that it did not clearly abuse its discretion in denying the petitions to reopen the record, that its provision for negotiations for sale of the Evansville line was legal, and that there is substantial evidence in the record in support of the Commission's findings. Therefore, we affirm the order of the Commission.

I.

This case requires resolution of the conflict between §§ 5(2) and 5(4)3 of the Interstate Commerce Act which arises whenever an applicant seeks authority to acquire control of a railroad in a situation where the applicant has already acquired some measure of control without prior Commission approval. While § 5(2) directs Commission approval of a proposed control transaction if it will be "consistent with the public interest," § 5(4) declares it unlawful to enter into such a transaction without § 5(2) approval. Denial of a § 5(2) application because of a § 5(4) violation may deprive the public of important transportation benefits; approval of a § 5(4) fait accompli rewards the lawbreaker. The Commission is not a stranger to this dilemma.

The Commission weighs a § 5(4) violation when it determines whether a control transaction will be in the public interest. In its leading case on this question, the Commission said:

"The public interest is concerned not only with improvements in transportation service, but also with the maintenance of respect for and the observance of the law. If the Frisco is permitted to retain the fruits of its unlawful conduct, and we sanction such conduct, which we consider to have been in flagrant disregard of the law, others will be encouraged to pursue a like course and to present a fait accompli for our approval. Obviously, such is not in accord with the intent of the statute; i. e., that we pass upon `proposed' acquisitions of control prior to their consummation, including the justness and reasonableness of the terms upon which such control is to be acquired. If the indicated practice were generally followed, our administration of the statute in the public interest would be seriously hindered, if not defeated." Central of Georgia Railway Co. Control, 307 ICC 39, 43-44 (1958).

See also, Gilbertville Trucking Co. v. United States, 371 U.S. 115, 128-129, 83 S.Ct. 217, 9 L.Ed.2d 177 (1962). Where the statutory violation is flagrant, in open defiance of Commission authority, the public...

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