Opinion ID: 548336
Heading Depth: 2
Heading Rank: 2

Heading: Acquisition Decision

Text: 27 The RLEA also seeks review of the Acquisition Decision, in which the Commission concluded that FRVR's purchase of Duck Creek South was an acquisition by a non-carrier, thus subject to section 10901. The RLEA argues, again, that the formalities of corporate structure--here, the use of a newly created subsidiary to make the purchase--should not be allowed to obscure the true nature and practical effects of the transactions. According to the RLEA, the acquisition of Duck Creek South should have been treated as a section 11343 transaction because of the relationship among the various Itel entities and because FRVR was created largely for the purpose of evading the labor protection provisions of section 11347. 28 In addressing petitioners' charge that FRVR was effectively the alter ego of Itel, the Commission asserted that to sustain their argument, they must 29 show[ ] [either] that FRVR was created exclusively for the purpose of evading the labor protection requirements of section 11347 or that FRVR is not a separate entity because it is not sufficiently independent of its parent or affiliated carriers. 30 Acquisition Decision at 6. The Commission found that petitioners had failed the first test because the record confirmed that FRVR had been formed for legitimate and substantial business reasons that were unrelated to the labor issue. It also found that there were sufficient indicia of the subsidiary's financial and operational independence to justify classifying it as a non-carrier, citing Railway Labor Executives' Ass'n v. ICC, 819 F.2d 1172 (D.C.Cir.1987) (RLEA v. ICC ), and Railway Labor Executives' Ass'n v. United States, 791 F.2d 994 (2d Cir.1986) (RLEA v. U.S.), as authority for this conclusion. 31 These cases amply support the Commission's analysis of the independence factor. In RLEA v. ICC, we reviewed a Commission grant of an exemption from prior approval for a non-carrier's acquisition of a rail line. The acquirer, the Rochester and Southern Railroad, was a wholly owned subsidiary of Genesee and Wyoming Industries, Inc., which also owned two rail carriers that would have benefited from the acquisition. As in this case, the corporations had some common officers and directors, and the acquisition by Rochester and Southern was financed in part by an equity contribution from its parent. Nevertheless, Rochester and Southern would own and operate the line itself, publish its own tariffs, directly serve the acquired line's patrons, assume responsibility for its own financial and contractual obligations, purchase its own equipment, and hire its own employees. See 819 F.2d at 1172-73; Rochester and Southern R.R. and Genesee and Wyoming Industries, Inc.--Exemption from 49 U.S.C. 10901, 11301, and 11343, Finance Docket No. 30779 (I.C.C. June 27, 1986), at 2, 5. In affirming the Commission's determination that Rochester and Southern was an independent corporate entity, we explained: 32 Where, as here, a subsidiary is financially independent of its parent corporation and is not financially guaranteed by the parent ... the ICC is not compelled to ignore corporate formalities, but may instead decide each case on its own facts, treating related entities as separate where, in its judgment, the facts demonstrate sufficient indicia of independence. 33 819 F.2d at 1173 (emphasis in original). We then concluded that the ICC's analysis of Rochester and Southern's independence was reasonable and supported by the facts. Id. 34 The Second Circuit reached the same conclusion on similar facts in RLEA v. U.S., 791 F.2d at 1006, which we cited with approval in our RLEA v. ICC decision. See RLEA v. ICC, 819 F.2d at 1173. There, the parent company guaranteed its subsidiary's financial obligations to the selling carrier in connection with the purchase of approximately thirty-one miles of track and trackage rights. The guarantee did not, however, extend to any obligations that the subsidiary might incur in the operation of the newly acquired line. Looking to the indicia of independence of the subsidiary, the court affirmed the Commission's conclusion that the subsidiary was independent and thus a non-carrier, explaining that with the exception of the initial purchase guarantee, the subsidiary ha[d] assumed all of the risks of the venture on its own and is not to be financially guaranteed by its parent. 791 F.2d at 1006. 35 In the instant case, the Commission followed precisely the reasoning of RLEA v. ICC and RLEA v. U.S., and treated Itel and FRVR as separate entities based on its assessment of FRVR's independence. See Acquisition Decision at 7-8. In its factual analysis, moreover, the Commission adhered to clear precedent: Like Rochester and Southern in RLEA v. ICC, FRVR would own and operate the acquired line under its own name, publish its own tariffs, have its own employees, management, and equipment, and assume sole responsibility for its own operating liabilities. Id. at 4, 7-8. Thus, on examining the indicia of FRVR's independence, the Commission reasonably concluded that FRVR was financially and operationally independent of its parent and a non-carrier. See Acquisition Decision at 8. 36 Petitioners, however, argue that Itel's guarantee of a portion of the acquisition debt--a condition admittedly not present in RLEA v. ICC--demonstrates that FRVR is not sufficiently independent of its parent. We agree with the ICC that this guarantee alone need not negate FRVR's financial independence. Although, in RLEA v. ICC, we did not specifically adopt the distinction made in RLEA v. U.S. between a financial guarantee undertaken by the parent in connection with the initial acquisition financing of its subsidiary and a financial guarantee of the subsidiary's operations, see 791 F.2d at 1006, that distinction is reasonable and properly applied in this case. A newly organized subsidiary will be endowed either with assets with which to commence business or with the financial means to acquire them. It makes little difference whether the initial financing takes the form of cash or a debt guarantee to cover the purchase of capital assets. We thus find it perfectly reasonable for the Commission to conclude that FRVR is financially independent of its parent because Itel [has] assum[ed] none of the risks in the operation of the line. Acquisition Decision at 8. 37 Petitioners nevertheless challenge the Commission's test of independence by referring us to several recent ICC decisions which, they say, undermine the Commission's reasoning in the instant case by using a different standard for determining whether a subsidiary is a non-carrier. See, e.g., Delaware and Hudson Ry. Co.--Lease and Trackage Rights Exemption--Springfield Terminal Ry. Co., Finance Docket No. 30965 (I.C.C. Oct. 23, 1989); Rio Grande Indus., Inc.--Purchase and Related Trackage Rights--Soo Line R.R. Line Between Kansas City, MO and Chicago, IL, Finance Docket No. 31505 (I.C.C. Nov. 13, 1989). Whatever the merits of those decisions, they have no bearing on our disposition of the petition for review of the Acquisition Decision because that decision was delivered before the ones cited by petitioners. It is our task to determine whether that case was properly decided on the basis of the policies and precedents relied on by the agency at the time of its decision. See, e.g., Reservation Tele. Co-op. v. FCC, 826 F.2d 1129, 1134 (D.C.Cir.1987); Population Institute v. McPherson, 797 F.2d 1062, 1092 (D.C.Cir.1986). 38 The other factor relied on by the ICC in determining FRVR's status was whether FRVR was created exclusively for the purpose of evading the labor protection requirements of section 11347. Acquisition Decision at 6 (emphasis added). Petitioners urge that the formalities of corporate structure should have been disregarded because a substantial purpose of FRVR's creation was to evade the imposition of labor protection. 39 As evidence of such a purpose, petitioners point to certain provisions of the purchase agreement between FRVR and CNW that stipulate, first, that consummation of the transaction is conditioned on its exemption from ICC regulation under section 10901; second, that FRVR warrants that it will qualify as a non-carrier within the meaning of section 10901, it being understood that one of the factors inducing [CNW] to enter into this Agreement is the foregoing representation; and third, that the closing of the transaction is subject to the condition that no administrative or judicial order or decision shall contain or impose on [FRVR] any conditions or provisions for labor ... protection.... Petitioners maintain that these provisions indicate that the transaction was deliberately structured to avoid employee protection. 40 In its decision, the ICC responded to this argument by observing, first, that the existence of the Agreement's labor provisions is not, by itself, dispositive of the issue of whether FRVR was created exclusively to evade labor protection. Acquisition Decision at 6. It then referred to a similar purchase agreement in another case in which the Commission had concluded that such provisions served the legitimate business purposes of preserv[ing] contractual freedom should the economics of an agreement be altered by regulatory action and establish[ing] the compensation the seller is willing to receive and the amount the buyer is willing to pay. Id. at 7. The Commission found that in the instant case the labor provisions served legitimate objectives and that the RLEA had submitted nothing of record to show that the avoidance of labor liabilities was the exclusive reason for the creation of FRVR. Id. 41 At the same time, the Commission declared that the evidence suggests that FRVR was created for a number of reasons. Id. For instance, the Commission noted that Itel Rail and CNW believed that as a local short-line carrier, FRVR would be able to forestall the traffic erosion that CNW had been experiencing on the Duck Creek South lines and otherwise to compete successfully with motor and other carriers in the area. This conformed with the Commission's own experience, which indicated that small regional carriers were able to operate marginal lines more effectively than larger carriers because of their local orientation and dependence on local traffic for survival. Id. The ICC also observed that FRVR's creation resulted from the desire to insulate Itel and Itel Rail from the risks assumed by their subsidiary's new venture beyond the amount advanced as initial capital in the form of cash and a loan guarantee. Id. 42 There is evidence in the record to support the ICC's conclusion that these were in fact valid reasons for FRVR's creation. In the notice filed by FRVR and CNW for an exemption from section 10901, the two companies represented that 43 FRVR was formed as a separate subsidiary ... because this structure ... will minimize the risks to Itel Rail of this new regional rail operation. In addition, this structure will make it possible to consummate the transaction and commence operations more quickly than any other available alternative. Itel Rail and FRVR have determined that timely commencement of service is absolutely essential to FRVR's ability to compete with other rail and motor carriers in the area. In particular, FRVR will face substantial competition from Wisconsin Central Ltd., which has been actively soliciting commitments from shippers. This structure offers FRVR the greatest prospect of being able to commence operations quickly, a vital element of its strategy to be an able and effective competitor in the region. 44 Notice of Exemption filed Sept. 28, 1988, at 4-5. These assertions are supported by a verified statement of Stephen P. Selby, President of FRVR, who confirmed the above and stated that [w]e recognize that the major factor which makes regional railroad operations a success is their ability to be customer responsive quickly and at top levels. Verified Statement of Stephen P. Selby dated Dec. 22, 1987, at 2, 8. See also Verified Statement of L.F. Fox, Assistant Vice President of CNW, at 5 (Our objective now is to identify lines which, while characterized by conditions that preclude successful operations by [CNW] ..., nevertheless can be operated profitably and efficiently by a new regional carrier.). 45 Based on the above, we are satisfied that the Commission reasonably concluded that FRVR was organized for substantial business reasons unrelated to the employee protection liabilities that would have been incurred had the purchase been made by an operating rail subsidiary. We are reluctant, however, to endorse the Commission's formulation that in order to be considered an alter ego of its parent, a subsidiary must have been created for the exclusive purpose of evading the employee protection provisions of section 11343. We prefer to defer that determination until such time as we are presented with a case where the justifications for the formation of a non-carrier subsidiary are less substantial, and the reasonableness of the Commission's rule can be put to a more demanding test. 46 In the instant case, therefore, we simply conclude that as FRVR met the test of independence and was formed for reasons that are both legitimate and substantial, the ICC could reasonably determine that it was a non-carrier for purposes of section 10901.