Opinion ID: 395213
Heading Depth: 2
Heading Rank: 1

Heading: History of Reorganization

Text: 3 The ICC's order directing service over the Rock Island lines was the culmination of a four and a half year effort to save a dying railroad. In March of 1975, the Rock Island filed a petition for reorganization under Section 77 of the Bankruptcy Act. 11 U.S.C. § 205 (1974). Despite the creditors' demands for immediate liquidation, the court determined that an income based reorganization of the railroad was not clearly impossible. The Rock Island continued to operate under the direction of trustee William M. Gibbons (the Trustee) while attempts were made to formulate a viable reorganization plan for the bankrupt railroad. 4 In an effort to stimulate recovery, the court authorized substantial capital expenditures to repair the Rock Island's dangerously deteriorated track and equipment. The Trustee sought additional assistance from the Federal Railroad Administration (FRA) but received a disappointing response. The FRA denied the Trustee's request for federal rehabilitation funds amounting to more than $130 million. The agency did, however, approve a priority loan of $17.5 million in 1976, and later authorized a subordinated loan of $33.5 million for equipment repair. 5 Unfortunately, these efforts did little to arrest the decline of the Rock Island. Between March 1975 and June 1979, the railroad suffered losses totalling more than $157 million. In July of 1979, the FRA conducted an extensive survey of Rock Island facilities. Over 50 percent of the main line track was inspected and one quarter of that track was found to be below Class 1 standards, which by law cannot be operated. Equipment maintenance was found to be dismal. The FRA concluded that it could no longer grant waivers to its track standards to the Rock Island since there (was) no prospect of the lines being brought up to minimum standards. 6 On August 28, 1979, the Brotherhood of Railway and Airline Clerks struck the Rock Island. Although the Trustee attempted to continue essential rail service using management personnel, substantial amounts of harvested grain which required immediate shipment could not be transported by the Rock Island. 3 The ICC met on September 18, 1979, to consider directing service by another carrier over the Rock Island lines in an effort to relieve a growing transportation crisis. The Commission determined that it needed more information and adjourned without taking action. Two days later, President Carter exercised his power under Section 10 of the Railway Labor Act (45 U.S.C. § 160) and appointed an Emergency Board to intervene in the Rock Island labor dispute. The striking workers were thus temporarily required to return to their jobs. When the Trustee refused to pay the prevailing wage, however, the employees refused to return to work. The United States subsequently failed to take action to enforce the President's order, and Rock Island operations were effectively shut down. 7 The Trustee appeared before the reorganization court on September 21, 1979, to report on the financial condition of the railroad. At that time, Rock Island creditors and stockholders argued that the strike had totally depleted the railroad's cash reserves and that the court could not constitutionally require the carrier to continue operations. The Trustee insisted that the Rock Island had sufficient cash to operate and succeeded in convincing the reorganization court that an income based reorganization was still not impossible. The FRA concluded, however, that the Trustee's financial analysis was unreliable and unresponsive to the company's service obligations. Secretary of Transportation Neil Goldschmidt therefore urged the ICC to direct service over the Rock Island lines.