(erielack) Re: 1962 Eastern Airlines Subsidy Request

[BurtWD_@_aol.com]

Did the railroads or their stockholders sue the federal government for the 
damage its policy had caused to the railroads?

Actually, they did, after a fashion.  After the eastern railroads went 
bankrupt, Congress responded to the short-term crisis with the Regional Rail 
Reorganization Act of 1973 ("3R Act"), which established the United States 
Railway Association to plan and fund a combined reorganization of the 
carriers.  This law required the railroads' trustees to delay liquidation 
until USRA came up with a plan.  

The trustees of most of the roads argued that this delay forced them to stand 
by while their railroads sank further into the mud, causing an 
unconstitutional "erosion of the estate" (reduction of asset value available 
to settle up with creditors) for the benefit of the government.  I don't 
recall that the trustees specifically based their argument on past harms done 
to the rail industry by federal policy, but everyone knew that the new delays 
were especially painful coming on top of years of punitive regulatory policy 
that had effectively expropriated the funds needed to maintain track and 
other facilities.  It was the past harms--symbolized by "standing 
derailments" and the like--that gave weight to the trustee's complaints about 
further erosion.

Anticipating that the railroads' trustees and creditors potentially would be 
able to lodge some very large claims against the government, USRA proposed to 
reorganize most of the Northeastern rail system as a new, for-profit company 
endowed with federal funds to correct years of deferred maintenance.  The 
trustees would exchange most of their companies' rail assets for Conrail 
securities.  Theoretically, if the reorganized system was designed correctly 
and funded adequately, the trustees would receive adequate value.  If the 
plan didn't work as intended, they could still file claims against the 
government at a later date and attempt to recover any shortfall.  

Naturally, the trustees continued to disagree with USRA, and their arguments 
became the basis of a Supreme Court case, Regional Rail Reorganization Act 
cases, 419 U.S. 102 (1974), in which USRA prevailed.

This legal reasoning was later obscured by the fact that the USRA plan for 
Conrail essentially failed between 1976 and 1981.  As a result, the estates 
of the bankrupt railroads settled their claims for cash and the government 
advanced additional funding to Conrail, leading many uninformed observers to 
characterize the federal government's investments in Conrail as a "bailout" 
of the bankrupt railroads.  The government's later funding of Conrail's 
losses could be called a bailout of Conrail, but the initial funding was in a 
very real sense an attempt to compensate the bankrupt railroads for the 
assets that had been taken and whatever erosion of the estate had occurred 
while they waited for Conrail to get up and running--and in the end they got 
more cash anyway.

I do not mean to suggest that such compensation was even remotely adequate 
for the damage that had been done over 80 years of increasingly irrational 
regulation.

Erie Lackawanna fans should understand that this need to show that Conrail 
would be successful largely accounts for the demise of EL.  The 3R Act left 
USRA with an inherent conflict:  USRA was charged with the responsibility for 
designing a competitive rail system for the Northeast, yet its primary 
mission was to do whatever it could to ensure that the largest part of that 
system, Conrail, would become viable.  Even after Conrail was launched, USRA 
remained its federal banker.  

Selling most of EL to Chessie System was USRA's response to the competitive 
mandate, but many USRA staff people and others believed that the only way 
Conrail would have a chance to become viable was to give it a virtual 
monopoly.  In July 1975, USRA adopted "Unified Conrail" (the monopoly) as the 
fallback option if Chessie failed to acquire EL, rejecting the Mid-Atlantic 
Railroad Corp.-EL (MARC-EL) plan that would have expanded EL by adding pieces 
of LV, CNJ, RDG, and L&HR.  Despite the controversy that surrounded USRA's 
recommendation, Congress failed to overturn it, and the monopoly came to pass 
in early 1976.

WDB

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