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CITY OF NEW YORK v. UNITED STATES

January 20, 1972

CITY OF NEW YORK, Plaintiff, and Bush Terminal Railroad Users Association, Inc., et al., Intervening Plaintiffs,
v.
The UNITED STATES of America et al., Defendants


Friendly, Chief Circuit Judge, Mishler, Chief District Judge, and Weinstein, District Judge.


The opinion of the court was delivered by: FRIENDLY

FRIENDLY, Chief Circuit Judge:

In this action against the United States, the Interstate Commerce Commission, Bush Terminal Railroad and certain of the latter's officers and directors, the City of New York, joined by several intervenors, asks us to annul an order of the Interstate Commerce Commission dated December 13, 1971, in F.D. No. 25896, which authorized abandonment of the entire line of Bush Terminal Railroad Company (the Railroad) in Kings County, New York, and Hudson County, New Jersey. The order, which was effective immediately, was entered after the Railroad on December 1, 1971, had unilaterally imposed an embargo on all outgoing freight and announced that on December 15, 1971, it would impose a similar embargo on all incoming freight, because of the allegedly unseaworthy condition of its marine equipment, and after users of the Railroad had begun an action to enjoin the embargo which they considered to be an unauthorized abandonment. The Railroad terminated operation on December 13 immediately on learning of the Commission's order. *fn1"

 On December 17, the City began this action and sought a temporary restraining order, see 28 U.S.C. § 2284(3). Judge Weinstein denied this but set the City's motion for a temporary injunction for argument on December 22 before a three-judge court which he asked to have convened, 28 U.S.C. §§ 2321, 2325. At the argument, the Bush Terminal Users Association, Inc., United Transportation Union, the Brotherhood of Railway, Airline and Steamship Clerks, Freight Handlers, Express and Station Employes, and the Department of Transportation of the State of New York were allowed to intervene as plaintiffs. Issuance of a temporary restraining order was again refused, but we reserved decision on the motion for a temporary injunction pending the filing of the record and briefs.

 The Railroad, organized in 1903, is a wholly-owned subsidiary of Bush Universal, Inc., which had been known as Bush Terminal Company until July, 1968. The purpose of establishing the Railroad was to acquire franchise rights in city streets and extend to new buildings railroad services then being provided in Brooklyn, New York, by Bush Terminal. The line owned by the Railroad is only 1.8 miles long. This connects with some 13.56 miles of track in Brooklyn and carfloat and towage facilities that are operated by the Railroad but are owned and had previously been operated by Bush Terminal, allegedly as agent for the Railroad and for trunk line carriers serving New York Harbor. In Bush Terminal R.R. Co. Operation, 257 I.C.C. 375 (1944), the Commission authorized the Railroad, pursuant to § 1(18) of the Interstate Commerce Act, to extend its railroad by acquiring through lease the trackage and other facilities owned by Bush Terminal. The lease took effect on January 1, 1945. Since then the Railroad, as a common carrier, has moved cars between industries in and near the Bush Terminal in Brooklyn across New York Harbor to and from various trunk line terminals in New Jersey. In December, 1968, Bush Terminal, having changed its name and become a conglomerate, controlled by Universal Consolidated Industries, Inc., a still more conglomerated conglomerate, conveyed all its real estate, including some of the land over which the Railroad operates, to a newly organized, wholly owned subsidiary, Bush Terminal Company, Inc. This new subsidiary assumed its parent's obligations under the lease to the Railroad. We will generally refer to Bush Universal, Inc. and Bush Terminal Company, Inc., simply as "the Terminal Company."

 The Railroad, on October 23, 1969, filed an application under § 1(18) of the Interstate Commerce Act for permission to abandon the operation both of its owned and of its leased properties. Hearings were held in late June, 1970. The application was opposed by users of the service, governmental and quasi-governmental bodies and labor organizations representing the Railroad's employees. In their post-hearing briefs the City, the State, and the Users Association for the first time raised the issue that authorization of abandonment by the lessee, the Railroad, would not relieve the lessor, the Terminal Company, of its independent obligation to operate the leased properties, an obligation that would revive upon discontinuance of operations by the lessee. See Lehigh Valley R.R. Co. Proposed Abandonment of Operation, 202 I.C.C. 659, 663 (1935); Norfolk S.R.R. Co. Receivers Abandonment, 221 I.C.C. 258, 260 (1937); Livestock Terminal Service Co. Abandonment of Operation, 257 I.C.C. 1, 7 (1944); Hoboken R.R., Whse. & S.S. Connecting Co. Operation, 257 I.C.C. 739, 743-44 (1944). The Railroad responded, correctly enough as a matter of law, see Meyers v. Famous Realty, Inc., 271 F.2d 811, 814-815 (2 Cir. 1959), cert. denied, 362 U.S. 910, 80 S. Ct. 681, 4 L. Ed. 2d 619 (1960), that this doctrine applies only when the lessor was a "carrier by railroad," see 49 U.S.C. § 1(18), when the lease was made; it claimed that the Terminal Company was not.

 On June 3, 1971, the examiner rendered a report recommending authorization of the abandonment. He found that, despite various promotional efforts, the Railroad's traffic had seriously declined, due to motor vehicle competition, and the moving of industries away from the Brooklyn area served by it; that the Railroad "has sustained substantial losses for many years, and prospects for reversing the decline in traffic and for profitable operations are very slim;" and that the property owned and leased by the Railroad was in such poor condition that an expenditure by it of approximately $930,000 would be required for rehabilitation of roadway and marine equipment. *fn2" With the Railroad's long record of losses and negative net worth, these funds could not be obtained except from the parent. The examiner concluded that, despite undoubted hardship to users, which might require many to move, with consequent loss of employment opportunities and revenues to the City and the State, there was no alternative to authorizing abandonment by the Railroad. Turning to the legal argument concerning the obligations of Terminal Company as lessor, the examiner concluded that this raised a factual issue of the lessor's earlier common carrier status, which had never previously been resolved and which could be tested in an action by the objecting parties under § 1(18) and (20). Thus, he declined to condition abandonment by the Railroad upon resumption of operation of the leased properties by the Terminal Company. Following the Commission's general practice in cases of complete abandonment where neither the carrier nor a parent carrier realizes economic advantages other than the termination of losses, *fn3" see Chicago, A. & S.R.R. Co. Receiver Abandonment, 261 I.C.C. 646, 652 (1946); Okmulgee Northern Ry. Co. Abandonment, 320 I.C.C. 637, 645-646 (1964); Manifestee & Repton R.R. Co. Abandonment, 324 I.C.C. 489, 492 (1964); Tennessee Central Ry. Co. Abandonment of Operations, 333 I.C.C. 443, 453-454 (1968), he declined to impose employee protective conditions.

 Exceptions and a reply thereto by the Railroad were filed with the Commission in early August. The City's, the Unions' and the Users Association's exceptions requested oral argument. On November 3, the Users Association filed a petition for leave to file a petition to reopen the hearing to include further testimony concerning the willingness of users to pay a surcharge of $25 per car. The Railroad replied by letter. On December 13, the Commission, acting by Division 3, entered the order to which we have referred. This noted that the exceptions had raised "a substantial question of possible damage to the environment" as a result of the substitution of trucks for railroad cars but concluded that "any damage that may occur to environmental amenities by our approval of this application is to be outweighed by the proven economic harm that would result from its denial." It upheld the findings and conclusions of the examiner and decided that, save for the point just stated, the exceptions and reply thereto raised no new or material issue and were not of such a nature as to require the issuance of a report. After denying the petition of the Users Association for leave to file a petition to reopen the record, it adopted the hearing examiner's order of abandonment "as the order of the Commission, Division 3, effective on the date of service hereof," which was specified to be December 13.

 I.

 If we were to view the matter apart from certain special considerations urged by the plaintiff and intervenors, it would be clear that the order of abandonment was supported by substantial evidence at the time it was issued. Between 1959 and 1969, the Railroad's traffic declined from 618,053 to 459,685 tons. During the same period, traffic for four types of customers -- tenants of the Terminal Company; tenants of an unrelated organization, Bush Terminal Associates; customers located on private sidings; and the Brooklyn Army base -- fell from 13,490 to 4,165 cars, those from the Army base having later dwindled to zero. Losses have been incurred every year since 1959. These attained highs of $368,431 and $376,644 in 1966 and 1967; while the losses for 1968 and 1969 were less, $311,910 and $220,582, respectively, the Railroad persuasively claimed the reduction was due principally to the deferral of maintenance expenditures which would have to be made if it were required to continue operations. The balance sheet as of December 31, 1969, shows current assets of $451,242 and current liabilities of $1,990,754. *fn4" The story seems to be the familiar one of decreased usage and higher costs leading to deterioration of plant, and deterioration of plant then leading to further decrease in usage and still further deterioration, until a time finally comes when the operation grinds to a halt, with attendant hardship on the remaining users and the employees. Courts are not free to annul the Commission's decision to allow abandonment under such circumstances simply because greater wisdom at an earlier date on the part of all concerned might have preserved a valuable transportation enterprise. See Washington & Old Dominion Users Ass'n v. United States, 287 F. Supp. 528 (E.D. Va. 1968) (three-judge court); Asbury v. United States, 298 F. Supp. 589 (W.D. Va. 1969) (three-judge court). As the examiner said, "an unprofitable operation cannot be expected to continue indefinitely for the benefit of shippers who may be adversely affected but who do not furnish sufficient traffic to support a line, or to furnish transportation during periods when trucks experience difficulty operating, or for such commodities as may not be handled economically by trucks."

 Before the hearing examiner, the plaintiffs argued that the loss figures constituted only bookkeeping losses which must be disregarded because they reflect intercompany charges arising out of a leasing arrangement between a parent and a wholly owned subsidiary, and that the Railroad and its parent must be viewed as a single entity to obtain an accurate financial picture. The examiner had abundant basis for rejecting these arguments. The Commission had earlier found the leasing arrangement between the Terminal Company and the Railroad to be fair, 257 I.C.C. at 379-381, and the examiner received and adopted new testimony reinforcing this conclusion. Apart from an annual fee of $25,000 for services such as telephones, casual engineering, and payroll accounting, which has remained unchanged since 1945 and which the Examiner permissibly found to be fair, indeed, low, payments were made for services actually rendered -- such as maintenance work and managerial services of officers of the Railroad who are also officers of the Terminal Company -- and for rent calculated on the basis of a basic rental component and a percentage rental component as provided in the lease. The percentage rental is 75% of the Railroad's net earnings from both its leased and owned properties; the basic rental is essentially an amount equivalent to property taxes, depreciation, and 5 1/2% of the assessed value of the leased real estate and the agreed value of the other leased property. An owner would have incurred the various service and managerial expenses. No payment of percentage rental has been made since 1959, there having been no net earnings since that date. Finally, the basic rental provides less than a fair rate of return, at least under current conditions where prime corporate bonds command rates in the neighborhood of 7%. In fact, in 1966, 1967, and 1968, the Railroad's actual payments to the Terminal Company were less than the current charges other than rent; *fn5" if it had been independently operated and had bonds outstanding, it would long since have had to take advantage of § 77 of the Bankruptcy Act. In short, it does not appear that the intercompany charges were either improper or unreasonable.

 Much is sought to be made of the benefit which the parent received from the Railroad's losses in its consolidated income tax return, but did not pass on to the Railroad. Whatever bearing this might or might not have on a claim by the Terminal Company in the case of insolvency on the part of the Railroad, cf. Western Pacific R.R. Corp. v. Western Pacific R.R. Co., 206 F.2d 495 (9 Cir.), cert. denied, 346 U.S. 910, 74 S. Ct. 241, 98 L. Ed. 407 (1953), the mere fact that, due to other income of the parent, the ultimate impact of the Railroad's losses may be less than if it stood alone, would not justify requiring railroad operations to be continued at a loss. Only the railroad business is to be considered in deciding whether an operation is unprofitable and should be abandoned. See Brooks-Scanlon Co. v. Railroad Comm'n, 251 U.S. 396, 399, 40 S. Ct. 183, 64 L. Ed. 323 (1919). This same principle also disposes of the contention that the parent, with its other profitable businesses, and the Railroad should be viewed as a single entity for financial accounting purposes, thus purportedly eliminating any showing of loss. Problems of constitutional dimensions would be raised by requiring a company to subsidize a losing railroad operation with non-railroad businesses, see id. -- particularly in a case such as this where the railroad business has failed to show a profit for some ten years. For purposes of this abandonment proceeding, then, the Railroad's historical losses are real, substantial, and not exaggerated by intercompany transactions. *fn6"

 Relying on a lease provision obligating the lessor to make capital expenditures with respect to the leased property, the plaintiffs advance a further argument that the serious condition of the equipment used by the Railroad is the result of the Terminal Company's failure to make necessary capital expenditures and the size of the estimated maintenance expenditures now necessary should therefore be appropriately discounted. More specifically, the lease provides that although the lessee is required to maintain the properties at its own expense, the lessor is obligated to make capital expenditures -- if not occasioned by the lessee's failure to maintain -- with the provisos that the lessor could terminate the lease if more than $100,000 of such capital expenditures were required in any year and that the lessee could either terminate the lease or make capital expenditures at the expense of the lessor if the latter failed to make necessary capital expenditures. There is evidence in the record which indicates that from 1960 through 1969 the Terminal Company made capital expenditures amounting to $786,751 with respect to the leased properties. This would suggest that only a little more than $200,000 additional capital could have been called upon in that ten year period to replace the large amount of rundown equipment being used by the Railroad. Even assuming that the lessee could have called upon the lessor to make additional major capital expenditures and that the result would have been a substantial reduction in the maintenance expenditures now necessary on the part of the lessee, it should be recognized that in fact any such capital expenditures must ultimately be paid for by the lessee since, among other things, the basic rental consists of a depreciation charge and an interest component. Thus, in the 1960 through 1969 period, depreciation charges payable to the Terminal Company by the Railroad amounted to $592,670. Also the record clearly shows that throughout much of that period the Railroad was in default in the payment of rent. By December 31, 1964, the Railroad owed the Terminal Company over four hundred thousand dollars and that sum increased to more than a million and a half by December 31, 1969. Indeed, since 1965, the annual increase in the Railroad's debit balance to the Terminal Company has exceeded $100,000. In light of these figures, it is very doubtful that the lessor has been obligated to make any capital expenditures for some time *fn7" -- at the least, not since the Railroad has been in default on its rent. Consequently, we see no basis for discounting the substantiality of the maintenance expense facing the Railroad should it be required to continue operations.

 We have reviewed the evidence before the Commission concerning the Railroad's physical and financial condition at this length in order to delimit the extent to which reconsideration of the specific matters here discussed *fn8" will be necessary on the remand to be prescribed in what follows. Compare Massachusetts Bay Telecasters, Inc. v. FCC, 104 U.S. App. D.C. 226, 261 F.2d 55, 65 (1958), ...


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