I don’t understand how a railroad bankruptcy works. I’m reading The Men Who Loved Trains. In reference to the PennCentral bankruptcy, it says “…was not one of your traditional rail reorganizations, where the creditors were given stock, and the railroad kept running”. What the heck? I thought, when a railroad went bankrupt, the creditors were just plain screwed, or forced to settle for cents on the dollar. Can someone enlighten me, about what happens when a railroad files for bankruptcy? Thanks.
Starting about 75 years ago the bankrupcy laws were changed for railroads. In a normal backrucy the goal is pay off the creditors by liqudating the business. The government decided with railroads the first goal should be to preserve service. Therefore, when many Class Is went into bankrupcy during the 1930s they were not liqudated but went through a financial reorganizations that would maintain service. As an example the MP went into bankrupcy with common stockholders, preferred stockholders, and I beleve five levels of bond holders holding first through fifth mortages. After the dust setteled the MP continued to serve their territory but the ICC and Federal Court gave the stockholders and four levels of bondholders nothing and the first mortgage bondholders common stock.
Many of the railroads in the 1930s that went into bankrupcy were able to pay their operating costs but they could not pay the interest on their debt. 40 years later when the PC, etc. rolled around the railroads were unable to even pay their operating costs.
It seems this isn’t all that different from how airlines deal with bankruptcy. They have to develop a plan with the judge, who monitors progress of the airline to getting out of bankruptcy. The airline also works with the judge to ramrod through new labor agreements. Delta airlines pilots recently took a pay cut and retirement programs also were hit. I doubt the Brotherhood of Locomotive Engineers put up with similar nonsense back in the 60’s.
What I did notice about the New Haven from the lofty vantage point of being 13 was that service was bad before the PC took over. It was worse afterward. People disappeared and so did trains. Property was either abandoned or locked up, then torn down. The New Haven wasn’t all that great before the merger, but afterward, it was an example of an orphan child so ugly no one wanted it.
Erik
Until about the 1980’s, railroads came under Chapter 77 of the Bankruptcy Act. This meant that any plan of reorganization had to be approved by both the Interstate Commerce Commission and the Court. Some very long bankruptcy proceedings (FEC was in bankruptcy for almost 30 years) were the result. What often happened was that the railroad property remained virtually intact and the creditors had to accept a lot less in the reorganization than they had hoped for.
In the 1980’s, the Bankruptcy Act was amended to put railroad bankruptcies under Chapter 11 like any other corporate bankruptcy. In Chapter 11, the initial goal is to reorganize the business as a going concern. The secured creditors usually accept stock in the new corporation as part of their settlement if the reorganization is approved. If the court determines that the business cannot continue as a going concern, the bankruptcy becomes a Chapter 7 liquidation, a procedure which can take several years.
This is a great simplification and I may be wrong about some things. Perhaps some of the legal eagles on the forum can explain this matter more accurately.
I am not a bankruptcy attorney, but from what I know of it, you summed it up pretty well. I would also add that, this is how most corporate bankruptcies work.
Gabe
Murphy:
Bob points out the Missouri Pacific bankruptcy, which I read about in the excellent book by Craig Minor called The Rebirth of the Missouri Pacific, which is a history of the MP from the 1930’s bankruptcy on.
Excellent book.
The one thing I didnt get in the book was the bankruptcy. I thought Minor just glossed over the bankruptcy, without giving details. Now, I see why. I wouldnt have understood it.
It was a very complex bankruptcy which took years to settle (20 or more I think) and then it really handcuffed the excellent managers of the MP during the 60’s.
I would strongly recommend the reading of the book when you get a chance. it is available by Library Inter lending.
ed
After finance, bankruptcy law is yet another area where railroads set new precedents. Naturally, it’s too complicated to explain here so read this history:
Railroad Bankruptcies
About 25% into the article they mention the effect of railroads. Also:
SEC
Thanks eastside for the link. That does explain a lot. In a nutshell, it kind of sounds like the stockholders lose what ownership they have in the railroad, and the railroad ownership transfers to those secured creditors, who had mortgages against the property. Please tell me that my banker isn’t out making loans to any company, and calling it a fifth mortgage.[:O]
I take satisfaction from this fact: The Lehigh Valley estate paid off their debts at 100 cents on the dollar! So did Erie Lackawanna, Reading and Lehigh & Hudson River! American Provident Union has done this too.
In a similar vein, the corporate shell of the Rock Island had its trusteeship lifted without having to re-organize. As the various railroad assets were sold off, the various creditors got paid off in full and the stockholders retained ownership of the firm, renamed Chicago Pacific Corp.