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Although much has been said and many charges have been made about mismanagement, and although there are evidences in the years prior to the petition in bankruptcy that there had been, at least, serious errors of judgment, nevertheless, it is the opinion of the court that the major causes of the present plight of the New Haven Railroad lie in the operation of economic forces—principally competition. Many of the large textile mills and kinds of industries for which freight branches were built have closed down or moved away. In their places are industries with less demand for moving materials or merchandise in large bulk, so that other means of transportation are used. The New Haven's ratio of passenger service to freight is among the highest in the country. Like nearly all other railroads, millions of dollars have for many years been lost on passenger service operation—a loss customarily made up out of freight profits. This was true of the New Haven up to 1959. Thereafter the losses have been a burden falling solely on the creditors of the Railroad. A few months after the opening of the Connecticut Turnpike the New Haven began to show a serious loss in its freight revenues and it has never had an operating profit since. A train proceeding from New York to Boston has truck competition on one side, sea borne competition on the other and air competition over head. All of these other forms of transportation directly or indirectly are subsidized by governmental assistance. Meanwhile the Railroad has to maintain its tracks, roadbed and other facilities and is heavily taxed in addition. The New Haven also suffers from the fact that it is a terminal railroad, that is, it ends at Boston, and its freight haul is very short. While the high per diem charge imposed upon the New Haven, for every day the cars of another railroad are on its tracks, its profit on nearly half the freight cars bringing loads into the area are realized only on the incoming trip because nearly half go back empty. Thus the huge losses of the passenger services are uncompensated by profit on freight; there is no present prospect that it will be, and the necessity for a determination of the advisability of stopping the passenger service is immediate and acute. Moreover, as a railroad the New Haven has not been free to compete; it has been and still is shackled with statutory provisions, rules and regulations originally designed to curb railroads when they were too powerful monopolies and when such governmental restraint was required. Though the necessity for such curbs has been greatly reducedparticularly in the case of the New Haven—the laws and regulations remain substantially unchanged.
Although the demand for the freight and passenger services of the New Haven have declined, it has far from disappeared. Last year it carried 25,750,000 passengers and 19,300,000 tons, consisting of 583,411 carloadings of freight. So important is the freight service that the record of the case is replete with statistics and expert opinion that fully support the Trustees' conclusion that it is absolutely vital to the economy of southern New England; and it takes little imagination to envisage the inconvenience posed by the absence of passenger service, particularly in the case of the approximately 25,000 commuters who are daily carried into and out of New York City.
The New Haven is, therefore, a transportation enterprise created in an economic climate when the demand for its services assured a return for the investment capital which established and sustained it. That climate no longer exists. The demand is only a part of what it was; but it is still sufficiently substantial to be of major importance to the economy and to the welfare of thousands. The transportation plant has been shrunk measurably since its 1922–23 peak. There has been, since the petition in bankruptcy was filed, strenuous belt-tightening, but the enormous increases in cost of operation far outstrip the savings which the rigid economies have achieved. It has to a great extent outlived the period when the high degree of its usefulness made it self-supporting, in spite of burdensome rules and regulations, and in spite of its terminal and short haul characteristics, but it is still so useful and necessary that the rest of the economy cannot afford to let it disappear, even though it cannot support itself. It, there. fore, has become a problem for the governmental bodies to decide whether or not it is in the public interest to keep the New Haven going to meet present demands and to supply the continuous transfusion of financial blood to make up for operating losses, particularly in the passenger service, in the event that the freight service problem can be solved through merger with a trunk line, and to supply the fresh capital for the replacement of what has become obsolete.
In the evidence submitted at the hearing the following table of statistics was submitted, which shows with particularity much of what has been generally stated above:
1 Includes small amounts of unassigned expenses. (Figures for 1964 are based on estimates, pending the compilation of final tabulations.)
As my be noted from this table, since these reorganization proceedings began, both the freight and passenger operations have continued to be unprofitable; the passenger service in particular has produced very substantial deficits. It has been possible for the Trustees to continue these services only by resorting to temporary expedients. Stringent internal economies made by the Trustees have not been enough and have had to be implemented by deferral of taxes and other current expenses, as well as postponement of considerable maintenance. In the face of declining revenues, however, these measures could not stem the tide indefinitely. Increased costs as the result of recent national labor awards and the need for maintenance which cannot be deferred threaten an imminent return to the substantial cash attrition which confronted the Trustees at the outset of their administration. Net wage increases, including fringe benefits, are estimated at $3,200,000 in 1964 and contributed to an estimated cash decrease of $2,500,000 during 1964. There remain cash obligations of an additional $1,700,000 on wage increases owed for 1964. Present estimates, assuming no other changes, are that the additional wage increases for 1965 and 1966 will total $4,800,000 and $6,000,000, respectively, for an aggregate, in the three years beginning January i, '1964, of $14,000,000. Moreover, additional labor settlements announced last week indicate that there will be further increases in wages and that the Trustees' ability to reduce the labor force further will be seriously curtailed. These pay scales were agreed to by the railroads and the unions on a national level; they did not arise out of a locally made agreement. The New Haven is subject to them. It is not feasible to attempt to operate for a sustained period of time with substandard wages, but the New Haven cannot pay at the increased rate and also bear the heavy losses incurred in the passenger service without suffering a frightening acceleration in the loss of cash. This is not to say that the wage increases, although they have wiped out the gains made in the administration of the bankruptcy estate, are the sole cause of the crisis in the affairs of the New Haven. They have simply made it more immediately acute. The crisis preceded and brought about the bankruptcy. The major contributing factor of passenger loss has existed throughout and at no time have the Trustees taken the position that there was any hope of reorganizing the New Haven Railroad as long as the passenger losses continued.
From their first report to this court and in subsequent reports, the Trustees have stressed both the necessity for a governmental underwriting of such passenger service as the public decides it wants, and the vital necessity of preserving adequate freight service for southern New England. They have, with this court's authorization, and through an enormous expenditure of time and effort, proceeded, and continue to press, by every available means to achieve the objective of merging the freight service in a trunk line system.
The figures showing passenger service losses were not questioned. They properly reflect a full allocation of costs, for to consider that these unprofitable operations can be continued on an out-of-pocket system of accounting is to ignore the basic premise that the law cannot indefinitely endure the confiscation of property without compensation. Those to whom is granted a public monopoly, compensatory in the main, can reasonably be expected to absorb the burdens of certain incidents of the monopoly. But no construction of due process will permit this court to require that the creditors of this estate witness the continuing erosion of their security without the slightest prospect of relief. It is important to underscore by quoting again what Judge Frank said in enunciating the law of this circuit in 1952:
“As the debtor is a public utility, the judge properly took into account the factor of the public interest in the debtor's continued operations. That, however, is but one factor; it must not be allowed to outweigh all others. There are strict limits to the extent to which, in reorganization proceedings, the interests of creditors (or of a particular class of creditors) may be sacrificed to the public interest; to exceed those limits is (to say the least) to come dangerously close to the edge of unconstitutional taking of property, a line from which courts should keep away if possible.” In re Third Ave. Transit Corp., 198 F.2d 703, 707 (2d Cir. 1952).
Confronted with such uncontested evidence of losses, this court would be justified in requiring further delay on the part of the Trustees only if there were such prospect of relief from official sources, charged with protecting the public interest, that the proposed expenditure of the estate's funds appeared unnecessary. At the hearing, representatives of the four states served by the New Haven urged that the court defer granting the relief sought by the Trustees because the passenger service was so affected with a public interest that public authorities should be afforded more time to devise a solution which would permit the service to be continued.
Were this the first occasion at which the problem was defined, a plea for delay in measuring the prospects for relief would evoke different reactions. For three and a half years, however, the published reports of the Trustees and the repeated views of this court have stressed the urgency of the problem. This could have surprised only those who, for reasons best known to themselves, refused to hear.
The record shows that the public interest has been thus far supported by the creditors of this estate with no substantial participation from the states. Further, it has been stated on numerous occasions that the operation of unprofitable passenger service, however essential, at the expense of the creditors could only be temporary, as a matter of due process.
This court noted the problem in a Memorandum of Decision in October, 1961, in passing upon the application of the Trustees to issue further certificates. At that time, the question was presented whether the creditors' security should be impressed with a prior lien to secure the borrowings needed to continue the road in operation. In granting the application the court stated that, “The present reorganization is concerned not only with safeguarding the rights of [creditors] but it is also vitally concerned with the public interest in preserving a transportation plant of major importance to the region in which it lies.” Filed in the record of that proceeding is an interim report of the Interstate Staff Committee addressed to its appointing authorities, the Governors of the States of New York, Connecticut, Massachusetts and Rhode Island, the County Executive of Westchester County, and the Mayor of the City of New York. That report took stock of economic realities in reminding the executives to whom it was made that a bankruptcy court might have to initiate steps for a "drastic curtailment in passenger service, particularly in commuter areas.'
On that occasion, the public interest in maintaining a going concern was allowed to prevail. It was noted, however, that the court could not permit continuation of unprofitable operations beyond “a reasonable period for fact finding and judgment.” In seeking to devise a workable plan of reorganization, it would ultimately be necessary that the Trustees move to "eliminate or exclude some services which the public may find necessary or desirable. If the states or local governmental bodies decide that such services should be continued then, they, directly or through an appropriate authority or agency, will contract with the Trustees for the requested operations and pay to the Railroad the full cost of them."
In March, 1962, the Trustees requested the court to advise them concerning the terms on which new, desperately needed equipment could be acquired for use in the west-end commutation service. Again, the court noted that this losing service was being operated only "to afford those who are guardians of the public interest, i.e. the executive and legislative officials concerned, to take the necessary steps to provide for a commuter service and eliminate the continuing loss to the debtor railroad." Ultimately, the continuation of the service would have to depend on the “extent and nature of the assistance provided by public authorities.” Unless the public could come forward with a program for assuming the losses of the service, the court could not justify granting the New York Port Authority a first lien on the estate to secure the Railroad's performance under a lease of cars.
In the light of these premises on which future commitments would be judged, the Trustees continued to negotiate for new equipment. In January, 1963, a second lease of new equipment was presented to this court in order to meet a deadline for continued tax relief in New York. Not only did the lease carry with it a commitment to continue the commutation service with equipment inadequate to the task, but there was again a total absence of any indication that direct financial assistance was being contemplated in any public quarter.
The year 1963 passed, the legislatures convened and closed, and no comprehensive program for public assistance had developed. The State of Connecticut did create the Connecticut Transportation Authority and did authorize it to expend limited sums to aid in maintaining desired railroad service in the state. While this was a good beginning, the funds appropriated were inadequate and, as a practical matter, their effective use depended upon joint action at least with the State of New York which failed to set up any corresponding machinery for aid.
In February, 1964, the court again stated that the passenger losses were being permitted solely to afford the states an opportunity to make a substantial contribution in areas where they wanted service continued. Concerned especially with the equipment crisis on the west end, the court asked the Trustees for a full report. This was prepared and filed in this proceeding, as a matter of public record. Report of Trustees on West End (New York City) Commuter Service (March 25, 1964).
In June, 1964, the State of New York, through the Port of New York Authority, indicated its willingness to lease sufficient equipment to the Trustees eventually to replace all the decrepit cars used in the west-end commutation service, and, in the interim, to refurbish the old cars pending manufacture of the new. The lease arrangement was similar to the prior unsuccessful ones, in that the New Haven would have to pay substantial rentals, in this instance totalling $30,000,000, and would be committed to a long term operation of the service. However, it was also proposed that the municipalities in Westchester County and the Connecticut Transportation Authority enter into contracts with the Trustees to pay $850,000 a year for two years to help in defraying the rental payments under the lease. The court at the time made clear that this amount was a mere token and wholly inadequate to take care of the operating losses but said it would accept the arrangement if further aid could reasonably be expected.
However, even though the court approved the proposal as a first step in an aid program, New York was unable even to deliver the $400,000 contribution involved, let alone give assurance of continuing support, and so the project collapsed. It became clear that whatever aid would come from any source other than Connecticut would be given grudgingly, if at all, and, more significantly, that no commitments based on the expectation of assistance would be justified.
Requests for delay must accordingly be judged in the context of these developments which are certainly known to those who now urge postponement. Far from being indifferent to the public interest, the court has indulged that interest and allowed it to prevail over the creditors' rights for three and one-half years.
In spite of this long interval, very little has been produced. Massachusetts never fulfilled its commitment to grant tax relief. New York, by conditioning future tax relief on a commitment by the Trustees to lease new equipment and conduct commutation service at present levels with no assurance that the deficits would be underwritten, has used it as a lash over the back of the debtor to compel it to do the State's will at a time when it has not had the strength to do so. Tax relief in Connecticut and Rhode Island was continued, but with a requirement that certain standards of service be met and, accordingly, that the passenger deficits continue to be incurred.
If the public interest so urgently demands the continuance of the New Haven's passenger service, as the States seem suddenly to have discovered, they should have stopped taxing its property a long time ago. Commuters and other passengers demand better equipment and better service; the States insist upon imposing a continuing tax burden-everyone wants to draw the last ounces of blood out of this near corpse; but no one gives it the transfusion it so badly needs. It is now too late in the day to talk about saving the situation with tax relief. As the Railroad has not been able to use its vital cash for taxes, liens have been accumulating ahead of the creditors, forcing them further down the ladder of priorities, and accelerating and compelling the action which the court has taken today. If this tax burden continues to grow and the Railroad is not otherwise relieved, the creditors will be compelled to move for liquidation of the New Haven and the court will have no recourse but to order it. If the States wish essential passenger services continued, an underwriting which goes far beyond tax relief will be necessary.
In this respect, it is not the role of this court-or the function of the Trustees who act as an instrument of the court-to determine what particular services are most in the public interest and to allocate among the states and the federal government what their respective contributions should be. These decisions can only be made by those whom the people have chosen to represent their interests : the executive and legislative branches of the state and federal governments. These branches cannot delegate to the court or its officers the matter of deterinining what public resources should be withdrawn from other governmental purposes and devoted to the preservation of rail passenger service. The evidence presented at the hearing revealed that the Trustees met with the Governors of the four states at the outset of their administration and that they have continued to meet with and make information available to numerous public officials. The court expects the Trustees to continue to cooperate with any interested public authority in seeking passenger service solutions, but the court will not charge them with the duty of formulating plans which can only properly be devised as an exercise of executive and legislative judgment.
To allow more delay would further invade the creditors' dwindling security and, because of a recent drastic worsening in the cash condition of the road, would frustrate the Trustees' attempts to preserve vital freight service in southern New England. The court must certainly reject the suggestion of the State of New York that the Trustees resort to further borrowings to give the states more time to act.
In evaluating the prospects of public assistance, the court is aware of the proposal by Governors Rockefeller and Dempsey to furnish, at nominal rental, the needed new multiple-unit equipment for use in the west-end communication service. The plan also calls for Connecticut and Westchester County to pay $800,000 per year in support of the service. If it can be implemented, the program, as the product of a long evolution described above, is unquestionably commendable as a means of replacing equipment-an objective which is consistent with the premises announced by this court from the outset of these proceedings.
It is still markedly inconsistent with those premises by continuing to refuse to regard the west-end commuter service as a part of the whole New Haven transportation system and by failing the face the fact that the commuter service losses, for the purpose of balancing creditor interest against public interest, must be weighed by the court on a fully allocated cost basis. Nor can the program be looked upon as ready life-preserver which will save the Railroad or even the passenger service, and thus present a reason why the granting of the Trustees' petition should be deferred. It calls for contributions of $5,000,000 from each of New York and Connecticut and $10 million from the Federal Government. Neither governor has an appropriation or the authority to furnish such a sum from his own state, and without action by the states it is unlikely that assistance will be forthcoming from the Federal Government. Even motivated by the best of intentions, it presently amounts to no more than a suggestion which is incomplete and inadequate. Not a dollar of the $20,000,000 is to be paid to the New Haven for operational cost. That sum would be used entirely by the New York Port Authority for the purchase of new cars to be loaned to the Railroad. This would only be helpful if provision were made fully to cover operating losses. As a token payment on account of such losses the Rockefeller-Dempsey plan proposes a contribution of $800,000 per year. This puts only a small dent in the annual operating losses for the west-end commuter