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JAY ST. CONNECTING R.R. v. UNITED STATES

June 26, 1959

JAY STREET CONNECTING RAILROAD, Plaintiff,
v.
UNITED STATES of America, Defendant, Interstate Commerce Commission, Intervening Defendant, William Meyers, Standard Brands, Incorporated, Atlantic Gummed Paper Corp. and Warshaw Manufacturing, Inc., Intervening Defendants, Moses Spatt and Joseph S. Wohl, Intervenors



The opinion of the court was delivered by: LUMBARD

The primary question presented in this proceeding to enjoin the effectiveness of a certificate of the Interstate Commerce Commission permitting abandonment of the Jay Street Connecting Railroad, 49 U.S.C.A. § 1(18), *fn1" is whether the action of the Commission is based upon adequate findings supported by substantial evidence. See Universal Camera Corp. v. N.L.R.B., 1951, 340 U.S. 474, 488, 71 S. Ct. 456, 95 L. Ed. 456; I.C.C. v. Union Pac. R. Co., 1912, 222 U.S. 541, 547, 32 S. Ct. 108, 56 L. Ed. 308; see also, 49 U.S.C.A. § 14(1); Alabama Great So. Ry. Co. v. United States, 1951, 340 U.S. 216, 228, 71 S. Ct. 264, 95 L. Ed. 225. We hold that the Commission's findings justify its conclusion that 'public convenience and necessity permit of such abandonment,' 49 U.S.C.A. § 1(18), despite the interest of these intervenor users in continued service, and that the record amply supports its finding that this railroad's 'future operating revenues will not be sufficient to cover the cost of providing safe facilities and continued transportation service as presently conducted.' The Commission's findings and conclusions rest 'principally upon the record of past operating results and prospects of future improvement, if any, weighed against the proved need of the users of the applicant's carrier service and the effect of the proposed abandonment upon the public generally.'

The Jay Street Railroad's main track of 3,102 feet extends for 7 city blocks in a small area of Brooklyn lying along the East River under and on either side of the ramp of the Manhattan Bridge. Bridge Street Yard is the main yard and consists of team tracks, holding tracks and classification tracks and a float bridge. This is at the railroad's easterly end and at the westerly end is its Empire Yard. There is no public terminal; there is no passenger traffic.

 The railroad delivers and receives freight cars solely by means of numerous spur tracks and team tracks totalling 6,313 and 3,352 feet respectively. Thus the railroad's business consists almost entirely of servicing the few large industries whose properties adjoin its tracks and are served by its spurs.

 Some of the railroad's main line and other trackage lies in the city streets and is leased from the City of New York at an annual rental under a franchise and lease contract which runs until December 31, 1961. The tracks and other land used by the railroad and not leased from the City are owned by Famous Realty Co., the successor of Famous Realty, Inc. and are rented to the railroad. About July 1, 1958 Famous Realty, Inc. was dissolved and its assets were distributed to its two stockholders, Moses Spatt and Joseph S. Wohl, who own all the stock of the railroad and who now hold the property under the firm name of Famous Realty Co. The railroad formerly was the lessee of Famous Realty, Inc. under a 10 year lease dated December 1, 1941 as detailed in the Commission's report. The railroad was obligated to pay real property taxes and assessments, to pay for insurance and to pay an annual rental equal to 2% of the assessed value of the leased property plus additional payments contingent upon its net income. When the lease expired it was not renewed but according to Moses Spatt its provisions have been continued in effect on a year to year basis and since June 1958 on a month to month basis. According to the record, the railroad has made no payment of rent or taxes during the past 4 years.

 The railroad owns the tugboat McCormack, built in 1900, a carfloat with capacity for 14 railroad cars, three obsolete diesel-electric switching locomotives, two flatcar type car-frames, several cranes, repair machinery and various motor vehicles and trucks. Almost all of this property is in need of extensive and costly rehabilitation, according to the report of the Commission.

 On June 17, 1958 the railroad applied to the Commission for a certificate of convenience and necessity authorizing abandonment of its operations. Subsequently users and an adjoining property owner secured an injunction against abandonment without I.C.C. approval, and the Court of Appeals affirmed. Meyers v. Jay St. Connecting Co., 2 Cir., 259 F.2d 532; 2 Cir., 262 F.2d 676. There is presently outstanding a permanent injunction against abandonment without approval of the I.C.C.

 On April 13 the Commission, having expedited its proceeding pursuant to the suggestions of the Court of Appeals, in a thorough and detailed 40 page opinion affirmed the examiner's preliminary report and certified abandonment. Thereafter it granted a petition for reconsideration and on May 26 reaffirmed its original order modifying a condition on the abandonment to require sale to any interested person for continued operation. See fn. 2 infra.

 This proceeding pursuant to 28 U.S.C.A. § 2325 (1952) was commenced by the railroad on June 1, 1959. See fn. 1 supra. Thereafter on June 10, Meyers, an owner of property serviced by the railroad, and several users of the railroad, intervened in the proceeding, 28 U.S.C. § 2323, and filed a cross-claim attacking the issuance of the certificate on the merits. On June 15 the landlords, Spatt and Wohl, also intervened to raise certain questions discussed below as to the scope and effectiveness of the sale condition.

 The Commission in its report finds that this railroad has sustained operating losses every year since 1953 amounting in each successive year and the first seven months of 1958 to $ 38,236, $ 18,290, $ 77,021, $ 120,562, $ 124,746, and $ 175,609 respectively; that in the years 1953 through 1957 the total number of carloads that moved over the line were 10,165, 10,224, 10,120, 9,249, and 8,704 and that there is a continuing and increasing diversion of business to competing transport facilities; that in its present physical condition the railroad requires at least $ 224,000 of rehabilitation, with an additional $ 200,000 required within a few years; and that there is no substantial possibility of such economies or increases in revenue as would justify continuance of the line.

 The intervening protestants dispute these findings and the conclusion which rests upon them on two bases which we shall discuss in detail. At the outset, however, we note that each and every contention advanced here was made to the Commission, was exhaustively considered by it, and was rejected on the facts in an extensive and able opinion.

 The first attack of protestants on the Commission's order is based upon the railroad's corporate relationship to the Famous Realty Company, of which it is a wholly owned subsidiary. They urge that as a result of this corporate relationship and of the undisputed existence of intercorporate transactions between parent and subsidiary amounting, as the Commission found, to about $ 200,000 per year, the Commission was obliged to place upon the applicant-railroad the burden of establishing the fairness of each and every one of its transactions with Famous by affirmative evidence. The Commission did not impose such a burden. It found that the specific transactions attacked by protestants were not unfair, and it gave protestants ample opportunity to cross-examine protestants' witnesses, including its long-time accountant, to examine its books, which protestants apparently declined to do, and to present such affirmative, evidence of overreaching as it desired, which it also failed to do.

 The protestants' argument that the Commission was obliged to place a higher burden of proof on the applicant amounts to an assertion that the affirmative evidence of its financial condition introduced by the applicant before the examiner was inherently unbelievable and therefore inadequate to sustain a finding that it did in fact sustain continuous and increasing operating losses. We are faced therefore with the question whether the Commission was within its discretion in expressly crediting the evidence of the applicant and its officers and employees as to its financial condition in prior years without requiring of them affirmative documentation of the fairness of each and every item of intercorporate expense. We have no doubt that it was.

 The Commission did expressly consider each of the specific transactions which the protestants here allege to have been unfair, and found no unfairness. Thus protestants here assert the failure of Famous to credit the railroad with retroactive tax and rent reductions on land leased by the railroad from Famous, which reductions resulted from successful certiorari proceedings instituted and prosecuted by Famous in the New York courts to reduce the assessed valuation of the properties. Protestants contend that a retroactive credit to the railroad for years prior to 1952 in the amount of $ 162,000 was required. First of all, we find no support in the record for the assumption that the credit, if one were required, would even approximate the sum contended for by protestants. It is more important, however, that the Commission found, and its findings are amply supported, that the lease, which it had formally approved in 1941 (244 I.C.C. 43), did not provide for such credits as to past years; that the railroad did not participate in the costs of the certiorari proceedings; and that credits were made for all years subsequent to the proceedings and the charges were reduced by Famous as a result of the successful litigation it had conducted. Protestants contend that Famous and the Railroad failed to carry on negotiations for reduction of the rent under the lease when the railroad ceased using certain of the properties originally demised. The Commission reasonably found the railroad's retention of the demised premises justified since 'the properties not presently used for railroad purposes but included in the lease, are available if and when needed.' The Commission similarly found no unfairness in the rent charged the railroad by Famous for the Vanneck parcel, a portion of the railroad's Bridge Street Yard which was acquired by Famous as a result of condemnation proceedings prosecuted by the railroad in the New York State courts, or in the charges by Famous outside the lease for rental of additional office space used by the railroad, or in the fact that the railroad at a cost of $ 22,000 built a shop on the Vanneck parcel prior to its acquisition by Famous although the title thereby passed to the landowner by operation of law. As to these latter objections the Commission found both that the economies expected from the shop justified its construction under the circumstances, and that any implication of overreaching which might nevertheless be drawn from these circumstances was overweighed by the fact that Famous did not exercise its power under the lease to increase the rent.

 In such circumstances, and in the absence of other affirmative evidence of overreaching, the Commission was not bound to disbelieve the applicant's evidence, or to find the evidence insufficient to sustain a conclusion as to its financial condition. The cases of Pepper v. Litton, 1939, 308 U.S. 295, 60 S. Ct. 238, 84 L. Ed. 281 and Perlman v. Feldmann, 2 Cir., 1955, 219 F.2d 173, 50 A.L.R.2d 1134 are not controlling here. This railroad is accountable not to the intervening shippers and interested parties, but to the Commission itself, which stands as the primary statutory arbiter and protector of the public interest. While courts have held that the fiduciary obligation of controlling stockholders may be asserted by creditors in bankruptcy, Pepper v. Litton, supra, and by minority shareholders in a sale by the majority of its controlling interest, Perlman v. Feldmann, supra, and thus shift to the fiduciaries the obligation to prove their fairness, such a rule is not per se applicable to the Commission. In the exercise of its expert judgment it may determine whether there is such evidence of overreaching as would require further proof from the applicant of its financial condition. Where, as here, the record contains substantial unrefuted evidence to support the Commission's conclusions ...


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