and by barge in varying quantities. While it is, for example, technically feasible and quite common to move both lumber and grain by truck, such moves are increasingly uneconomical compared to rail as size of shipment and length of haul increased. With the water mode, the limiting factor is accessibility to the waterways. DOT also made special analyses of mode substitution for coal and iron ore in the Northeast and found relatively limited substitution of water for rail on coal movements. In the North Central States where coal is used most extensively, there are few waterways adjacent to generating plants. In New England where many power plants are on the water, they now use oil (or receive coal by water already); there remain only four plants in New England which use coal as the principal fuel. There is some possibility for barge substitution on iron ore although at the expense of increased circuity.

A precipitate shutdown of Penn Central would also have a serious impact upon the five other major carriers in bankruptcy which serve this territory, as well as a ripple effect on other carriers beyond the confines of the Northeast. As President Nixon emphasized in his State of the Union Message of September 10, 1973,"

There can be no doubt that the plight of the rail lines in the 17 States of the Northeast and Midwest presents an immediate and far-reaching transportation problem. Six major railroad lines in this area are now bankrupt and shutdowns are threatened. The danger extends across the country because railroads in other parts of the Nation still use the bankrupt lines. A failure of any significant part of our Nation's railroad system would impair our ability to move freight efficiently to all parts of our Nation.

The class I bankrupts shown in the table below performed 46.2 percent of all rail transportation in official or eastern district territory and 13.7 percent of all U.S. rail transportation in 1972. Together the six bankrupts then operated approximately 27,000 miles of track, or 25 percent of the U.S. total. The Nation's railroads, of necessity, work together as a single system through the interchange of traffic with one another. Like the stone on the millpond, it is obvious that possible cessation of Penn Central's service between Maine and Missouri would have a disruptive ripple effect from coast to coast. In terms of main line traffic, it is evidence that the whole system suffers if one major railroad is unable to carry its share of the load. In short, all users of transportation service throughout the country stand to lose unless the essential elements of Penn Central's transportation facilities are kept in service. This is no less pertinent as to much branch line service.

13H. Doc. No. 93-1.

The relation of Penn Central and other bankrupt northeastern railroads to the United States rail network is shown below:

The Penn Central trustees' plan.-With the foregoing in mind, it is appropriate at this juncture to consider whether a plan of reorganization which contemplates elimination in its entirety of the transportation or railroad functions of the debtor constitutes a plan of reorganization within the meaning of section 77 of the Bankruptcy Act. Does it constitute a plan of reorganization which is compatible with the public interest? Our review of the legislative history underlying section 77, its purpose, and the precedents interpreting section 77 lead us to conclude that the PCT plan cannot be considered a plan of reorganization either within the letter or the spirit of that statutory provision.

Except for the reorganization of the New Haven, railroad reorganizations under section 77 have traditionally been unitary in nature. The so-called income-based reorganization reflected an arrangement whereby the debtor's financial obligations were restructured in a manner designed to permit the debtor to emerge as an entity capable of continued operation as a rail carrier, with sufficient earnings to defray operating expenses and make adequate provision for fixed charges. The achievement of this traditional plan permits termination of the reorganization proceeding.

Several of the earliest cases construing section 77 emphasized the inherent interest of the public in the continuance of the rail

enterprise through a plan which rehabilitated the carrier. Thompson v. State of Louisiana, 98 F. 2d 10, 110 (8th Cir. 1938); and In Re Denver & R.G.W.R. Co., 150 F. 2d 28, 34 (10th Cir. 1945), reversed on other grounds, 328 U.S. 495 (1946). In the latter case the Court of Appeals stated:

A railroad is a utility, impressed with a public interest. The very existence of our nation depends upon a sound, efficient, transcontinental transportation system. The purpose of section 77 is to provide an efficient and speedy method of reviving sick and ailing railroads. It recognizes the rights of creditors and stockholders of the road. It preserves their interest in the property and maintains the rank and priorities of various classes of creditors. In addition to all this, it seeks to reorganize the road, to place it on a sound financial footing, so that it may continue to operate and serve the nation's needs.

Similarly, in Van Schaick v. McCarthy, 116 F. 2d 987, 993 (10th Cir. 1941), the court observed that the purpose of the plan reorganization approved by this Commission was to maintain the integrity of the railroad so that it could be turned over to the reorganized company as a going concern. The object of section 77 said that court, is that a living, not a dying railroad enterpris

emerge.

The views of the lower Federal courts in these early decision construing the intent of section 77 were shared by the Suprem Court. Railroads were not to be treated as ordinary insolvents Palmer v. Massachusetts, 308 U.S. 79, 87 (1939). Reorganization under section 77 was bottomed upon the theory of debto rehabilitation by adjustment of creditors' claims. This was essential as ordinary bankruptcy liquidation or judicial sales were impossible owing to the size of the carriers' indebtedness and the paucity of buyers. Ecker v. Western Pacific R. Corp., 318 U.S. 448, 469 (1943). Stated differently, a basic requirement of any reorganization give the new company a reasonable prospect for survival. Group Investors v. Milwaukee R. Co., 318 U.S. 523, 540 (1943). Amplifying its views in the latter two cases, the Court commented in R.F.C. V. Denver & R.G.W.R. Co., 328 U.S. 463, 505 (1946):

was to

The complexities of the reorganization of a railroad with responsibility to the public and obligations to its security holders were recognized. The impossibility without destruction of efficiency and values of reversing the process of integration to restore the parts that now make up the whole of a system of their original operational function

was understood.

To ensure that the problems of equity receiverships would not inhibit the reorganization of a railroad under section 77 into a viable

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unit, the Congress entrusted this Commission with the role of architect of such a plan. As the Court observed in Palmer v. Massachusetts, supra:

The judicial process in bankruptcy proceedings under section 77 is, as it were, brigaded with the administrative process of the Commission. From the requirement of ratification by the Commission of the trustees appointed by the court to the Commission's approval of the court's plan of reorganization the authority of the court is intertwined with that of the Commission.

13 The foregoing decisions concerned themselves with the unitary reorganization of the insolvent debtor railroad into a healthy enterprise able to meet the public's continuing need for rail service. 14

A multiple-step reorganization of a railroad resulting in continuation of rail service by a carrier other than the reorganized debtor is within the intendment of section 77 as witnessed by the New Haven reorganization. The New Haven was authorized to be acquired by Penn Central by this Commission while it was undergoing reorganization. Its rail operations were thereby continued by Penn Central and the plan of reorganization approved by this Commission concurrent with the authorized inclusion of New Haven into Penn Central provided a procedure for determining the liquidation value of the assets of New Haven transferrred to Penn Central. New Haven Inclusion Cases, supra, at 428, 436. Asset value was of primary importance because New Haven had long been dry of earning power and lacked the prospect of earning power, ib. at 436. Inclusion of all of New Haven's properties in Penn Central with the question of their asset valuation left for determination in the remaining phase of the reorganization proceeding represented the only salvation for New Haven, ib. at 407, n. 41, 408, 411, 415, and 421. New Haven's vital rail service was thereby preserved and continued. Ib. at 494-495.

The Court in the New Haven Inclusion Cases reiterated the objectives of section 77 which we have discussed. Specifically, it noted at p. 431,

After 35 years of section 77, as amended, it is unnecessary to recanvass the two basic objectives of the statute-the conservation of the debtor's assets for the benefit of creditors and the preservation of an ongoing railroad in the public interest.

"In St. Joe Paper Co. v. Atl. Coast Line R. Co., 347 U.S. 298, n. 12 at 309 (1954), the Court, in finding that the Commission was without power under section 77 to compel a merger of a bankrupt carrier with another carrier, similarly noted that a railroad in reorganization is not a defunct organism, is a live and going concern, and that the desire to provide a ready remedy for the overhauling of its financial structure without impairing its primary responsibilities as a regularly functioning carrier was one of the principal reasons for the enactment of section 77.

Further with respect to preservation of essential service, the Court cited its earlier views in sustaining the Penn Central merger at page 492 that,

While the rights of the bondholders are entitled to respect, they do not command Procrustean measures. They certainly do not dictate that rail operations vital to the Nation be jettisoned despite the availability of a feasible alternative. The public interest is not merely a pawn to be sacrificed for the strategic purposes or protection of a class of security holders.

Penn Central's own reorganization court, it is interesting to observe, recently noted' that three basic themes emerged from the Court's opinion in the New Haven Inclusion Cases, viz (1) the purpose of a section 77 reorganization is to produce a viable corporate enterprise capable of supplying adequate transportation services to the public; (2) efficient use of the transportation plant is directly related to the primary purposes of section 77; and (3) the value of the estate, measured primarily by earning power, and the resulting capital structure, are crucial to the long-term financial soundness of the reorganized enterprise.

of

A corollary to these basic themes is the necessity for a plan reorganization of a railroad under section 77 to contain the seeds for a probable continuation of the debtor's vital service. The continuation of this service cannot be left to speculation and conjecture. As the Court of Appeals noted in In Re Chicago R. I. & P. Ry. Co., 72 F. 2d 443, 450, 451 (7th Cir. 1934),

*** The necessity of continuing the operation of the railroad, the impracticability of liquidating its assets through the usual methods adopted in courts of bankruptcy, the futility of selling division or sub-divisions of railroads or rolling stock, etc.—all unite to furnish a basis in fact for a classification of debtors which singled out railroad corporations and provided specifically for their administration supplied)

***

(emphasis

We have had occasion to provide for the continuation of all or substantial portions of the service of a railroad in reorganization by other carriers through the exercise of our powers under section 1(18) of the act as a step in attaining this objective of the Bankruptcy Act. In Tennessee Central Ry. Co. Abandonment, 333 I.C.C. 443, 455 (1968), the entire line of a railroad in reorganization was abandoned on condition that the line be sold to interested parties, several of whom had given notice of their definite interest in

15See Memorandum Opinion and Order No. 1189, dated April 16, 1973, which declined to approve at this time the Pennco settlement agreement.