Railroad Reorganization Under the U.S. Bankruptcy Code: Implications of a Filing by Amtrak
CRS Report for Congress
Railroad Reorganization Under the
U.S. Bankruptcy Code:
Implications of a Filing by Amtrak
Updated January 4, 2005
American Law Division
Congressional Research Service ˜ The Library of Congress
Railroad Reorganization Under the U.S. Bankruptcy
Code: Implications of a Filing by Amtrak
In 1997, Congress enacted the Amtrak Reform and Accountability Act, the goal
of which was to promote Amtrak’s self-sufficiency with respect to operating funds
within five years. The law has provisions directing Amtrak to make plans for its
liquidation in the event that it does not reach the goals set forth. It directs the Amtrak
Reform Council to present Congress a plan for restructuring intercity rail passenger
service. It also directed the General Accounting Office to report on the implications
of Amtrak’s possible liquidation.
Many years have passed, and Amtrak has realized neither profit nor operational
self-sufficiency. Although liquidation has not been proposed, the threat of shut-down
This report examines the railroad reorganization provisions under the U. S.
Bankruptcy Code, Subchapter IV, 11 U.S.C. §§ 1164 - 1174. These provisions,
which exclusively govern railroad bankruptcy, reflect the general flexibility of
chapter 11 to promote a wide variety of restructuring options, including liquidation.
In railroad bankruptcies, a trustee is always appointed and the “public interest” is
factored into the court’s decisions.
This report also considers the constitutional authority of Congress to restructure
railroad transportation under the Commerce Clause and to make laws concerning
bankruptcy and liquidation under the Bankruptcy Clause. In the case of railroad
insolvency, the two provisions are often related.
It is impossible to predict the precise financial impact an Amtrak bankruptcy –
reorganization or liquidation – might have on its creditors and employees. But much
of the concern expressed is focused on the future of rail service. It is unlikely that
Amtrak’s bankruptcy alone would determine the future of intercity passenger rail
service. Shaping the future of rail service need not, and in all probability would not,
occur solely through the vehicle of an Amtrak bankruptcy. Congressional action to
address national transportation needs may occur independent of a court’s supervision
of an Amtrak bankruptcy.
This report will not be updated.
Railroad Reorganization Provisions in the U. S. Bankruptcy Code...1
Amtrak as a Possible Debtor in Bankruptcy.....................5
National Transportation Policy Versus Debt Repudiation...........6
Railroad Reorganization Under the U.S.
Bankruptcy Code: Implications of a Filing by
Amtrak’s chronic financial problems and the threat of shut-down have led many
to question what procedures would be involved were Amtrak to file for bankruptcy
under the U. S. Bankruptcy Code, 11 U.S.C. § 101 et seq. It is impossible to predict
the outcome of any individual debtor’s bankruptcy. Each bankruptcy is intensively
fact-specific. The plan for and feasibility of reorganization – or liquidation – and the
pay out to various creditors depends upon agreements between a debtor and its
creditors that occur prior to and after the bankruptcy filing.1 This report surveys
those provisions in the Bankruptcy Code unique to railroad reorganization. And it
considers laws governing Amtrak that could affect its filing under the Bankruptcy
Railroad Reorganization Provisions in the U. S. Bankruptcy Code.
Background. The first bankruptcy provisions dedicated to railroad
reorganization were enacted during the 1930s. A new § 77, entitled “Reorganization
of Railroads Engaged in Interstate Commerce,” was appended to the Bankruptcy Act2
of 1898, the predecessor to the current Code. Despite the fact that § 77 was
amended over the years, it was perceived as inadequate to resolve railroad industry
problems arising during the 1970s. In 1973, in response to a national rail crisis
precipitated by the bankruptcy filings of eight railroads in the Midwest and3
Northeast, Congress passed the Regional Rail Reorganization Act. The act, intended
to supplement to § 77, created a government corporation, the U.S. Railway
Association, to formulate a plan to restructure the railroads into financially self-
sustaining rail systems. It created Conrail as well. The act withstood many4
constitutional challenges, including takings claims under the Fifth Amendment and
1In a report to congressional committees, the General Accounting Office examines the
implications of an Amtrak bankruptcy, including Amtrak’s relationship with its creditors,
as of the date of the report. See, Intercity Passenger Rail: Potential Financial Issues in the
Event That Amtrak Undergoes Liquidation (GAO-02-871, September 2002).
247 Stat. 1474 (March 3, 1933).
4Regional Rail Reorganization Act Cases, 419 U.S. 102 (1974). Congress concluded that
solution of the crisis required reorganization of the railroads, stripped of excess facilities,
into a single, viable system operated by a private, for-profit corporation, which could not be
created under § 77.
allegations that it violated the Bankruptcy Clause, which requires that Congress enact
“uniform Laws on the subject of Bankruptcies throughout the United States.”5
The Role of Chapter 11 Generally. Chapter 11 is designed to facilitate the
rehabilitation of business debtors through financial reorganization. The chapter is
premised on the assumption that creditors will be better served by preserving the
debtor’s business as an ongoing concern. If reorganization is not feasible, the debtor
may be liquidated under chapter 11 as well. Although procedurally complex, the
ultimate goal of the process is to permit a debtor, through negotiations with creditors,
to reach a consensual plan for a feasible reorganization. While the Code has many
provisions governing the process for reaching consensus, it is very flexible with
respect to the business formats and options that a debtor may pursue. In short, the
chapter is primarily concerned with two goals: preservation of the debtor’s estate in
a manner that optimizes its continuance as an on-going concern and marshaling the
estate’s assets for the benefit of creditors. However, a prime purpose of bankruptcy
is to safeguard certain creditor rights, especially those of secured creditors, and to
promote equality of distribution among similarly situated creditors. When
reorganization is not a viable option, disbursements through liquidation must be
made in accordance with the Bankruptcy Code requirements and applicable
Railroad Reorganization. Chapter 11 of the Code governs reorganization.
Subchapter IV, 11 U.S.C. § § 1161 - 1174, deals exclusively with railroads. A
railroad may not file for liquidation under chapter 7 of the Code,6 but a railroad may7
be liquidated under chapter 11.
Although all of subchapter IV deals with railroad-related issues, several areas
may be noted:
!Appointment of a trustee. A trustee is ordinarily not appointed to oversee a
general chapter 11 reorganization. Trustees are appointed “for cause”
including fraud, dishonesty, incompetence, and mismanagement of the
debtor’s affairs by management. In the case of a railroad debtor, the
appointment of a trustee is mandatory. The Secretary of Transportation is
directed to submit a list of five disinterested, qualified persons to the U.S.
Trustee for appointment.8
!Representation of regulatory agencies; the right to be heard. In a general
business reorganization, the Securities and Exchange Commission (SEC) has
a right to participate in the bankruptcy, but not to appeal court orders and
judgments. A railroad bankruptcy confers a comparable right upon the
Surface Transportation Board, the Dept. of Transportation (DOT), and any
5Art. I, sec. 8, cl. 4.
611 U.S.C. § 109(b)(1).
711 U.S.C. § 1174.
811 U.S.C. § 1163.
state or local commission having regulatory jurisdiction over the debtor.9 If
the provisions of a proposed reorganization plan would require Board
approval, it must be sought. Conditions or modification imposed by the Board
are subject to limited review by the court.10
!Protection of the public interest. The public interest as a discrete factor in
reorganization appears only in subchapter IV.11 The court and the trustee are
directed to consider the public interest in the preservation of the debtor’s rail
service – in addition to the interests of creditors – when they make decisions
regarding the debtor’s reorganization.
In addition to the foregoing, subchapter IV addresses considerations relevant to
a railroad debtor such as protecting creditors’ interests in rolling stock, termination
of railroad line leases, and abandonment of rail service.12
Interests of railroad employees. Several provisions of subchapter IV address
matters concerning employee benefits. For example, collective bargaining
agreements governing employee wages and working conditions are not subject to
modification by the court, except in accordance with § 6 of the Railway Labor Act
(RLA), 45 U.S.C. § 156.13 The RLA requires that disputes concerning rates of pay,
rules, or working conditions be submitted for arbitration to the National Mediation
Another Code provision grants first priority for unsecured claims under 11
U.S.C. § 507 to claims against the debtor railroad for personal injury or wrongful
death that may have occurred prior to the bankruptcy filing.14
Contents of a reorganization plan. Although the general requirements for
confirmation of a reorganization plan under chapter 11 are applicable,15 the Code
expressly provides that the reorganization plan may allow for continuance,
termination, transfer and/or abandonment of rail service and rail lines.16
911 U.S.C. § 1164.
1011 U.S.C. § 1172(b).
1111 U.S.C. § 1165. See S.Rept. 95-989, 95th Cong., 133 (1978) which comprises, in part,
the legislative history of the 1978 Bankruptcy Reform Act. The Senate Report notes that
the “public interest ... is an important factor in railroad reorganization, which distinguishes
them from other business reorganizations.”
1211 U.S.C. §§ 1168 - 1170.
1311 U.S.C. § 1167. Cf. 11 U.S.C. § 1113, adopted in 1984, governing modification or
rejection of collective bargaining agreements for other chapter 11 debtors.
1411 U.S.C. § 1171. This priority applies to employee and non-employee claimants.
1511 U.S.C § 1123.
16The legislative history of this provision indicates that the plan may:
[c]ontemplate a liquidating plan for the debtor’s rail lines, much as occurred in
If the proposed transfer to or operation of rail lines by another entity (other than
the reorganized debtor or a successor to the debtor) would require the approval of the
Surface Transportation Board, it must be sought by the debtor. Conditions or
modifications imposed by the Board are subject to limited review by the court.17
The Board, however, is directed to require that the rail carrier “provide a fair
arrangement at least as protective of the interest of employees as that established
under section 11347 of title 49.”18 The successor to the cited reference requires that
when affected railroads merge or are consolidated, the Board must require certain
employee benefit protections.
Plan confirmation. The court shall confirm a plan when it meets general
Bankruptcy Code requirements for confirmation. Creditors must receive or retain
under the plan property equivalent in value to what the creditors would receive if the
debtor were liquidated. The plan must be economically feasible and consistent with
the public interest.19
Liquidation. The Code does not preclude the filing of a reorganization plan that
is essentially a liquidating plan. If a plan has not been confirmed within five years
of the bankruptcy filing, a party in interest other than the debtor may request, and the
court may order, cessation of the debtor’s service and liquidation of the estate as if
it were under chapter 7.20
As the foregoing demonstrates, a railroad reorganization under the Bankruptcy
Code retains the same flexibility to accommodate a wide range of reorganization or
liquidation plans consistent with chapter 11 generally. With respect to railroads, the
“public interest” is expressly accorded statutory prominence. This provision may be
interpreted to allow greater regulatory input into the proposed reorganization and may
allow creditors to wait longer than other chapter 11 creditors for resolution of the
the Penn Central case by transfer of operating lines to Con Rail. Such a
liquidating plan is not per se contrary to the public interest, and the court will
have to determine on a case-by-case basis, with the guidance of the Interstate
Commerce Commission [Surface Transportation Board] and of other parties in
interest, whether the particular plan proposed is in the public interest, as required
under proposed 11 U.S.C. § 1172(3).
H.R. Rept. 95-595, 95th Cong., 1st Sess. 424-25 (1977).
1711 U.S.C. § 1172(b).
1849 U.S.C. § 11347 was repealed in 1995 and replaced by 49 U.S.C. § 11326.
1911 U.S.C. § 1173.
2011 U.S.C. § 1174.
plan.21 With respect to a liquidation, the bankruptcy proceeding minimizes litigation
to satisfy competing claims and provides finality to discharge of indebtedness.22
Amtrak as a Possible Debtor in Bankruptcy. Created by Congress in23
1970, Amtrak, arguably, may be unique among historic and prospective railroad
debtors. Although originally created as a “for-profit” company to provide national,
intercity passenger rail service, financial self-sufficiency has never been realized and
Amtrak has been dependent upon federal subsidies to maintain operation.24 Hence,
Amtrak, unlike a wholly privately-owned company, was created to serve an identified
national transportation need, and has been largely supported by federal funds.
Congress passed the Amtrak Reform and Accountability Act of 1997 to address25
Amtrak’s dependence on federal subsidies. The law created a goal of operational
economic self-sufficiency by 2002.26 Among other things, it created the Amtrak
Reform Council. The Council was charged with the responsibility to assess the
likelihood of Amtrak meeting the mandated goals. If the Council found that the goals
were unlikely to be met by 2002, it was to “develop and submit to the Congress an
action plan for a restructured and rationalized national intercity rail passenger
system,”while Amtrak itself would “develop and submit to the Congress an action
plan for the complete liquidation of Amtrak, after having the plan reviewed by the
Inspector General of the Department of Transportation and the General Accounting
Office for accuracy and reasonableness.”27
The law sets out a proposed procedure for consideration by the Senate of a28
restructuring or liquidating plan proposed by Amtrak or the Reform Council. To
date, despite Amtrak’s lack of operational self-sufficiency, the Congress has not
pursued a course recommending or mandating Amtrak’s liquidation, but has provided
21See Regional Rail Reorganization Cases, supra note 4. Creditors of Penn Central Railroad
argued that mandatory continued loss operation of the railroad constituted an “erosion
taking” in violation of the Fifth Amendment. Acknowledging that such a taking could
occur, the Court cited the qualifying proposition that “a railroad estate [may] suffer interim
losses for a reasonable period pending good-faith efforts to develop a feasible reorganization
plan if the public interest in continued rail service justifies the requirement.” Id. at 122-23.
22Technically, only individuals receive bankruptcy “discharges,” although confirmation of
a chapter 11 plan has the same effect for corporate debtor. 11 U.S.C. §§ 727, 1141.
23P.L. 91-518, the Passenger Rail Service Act of 1970.
24CRS Report RL31473, Amtrak Profitability: An Analysis of Congressional Expectations
at Amtrak’s Creation by D. Randall Peterman.
26Id. at § 201. “Commencing no later than the fiscal year following the fifth anniversary of
the Amtrak Reform and Accountability Act of 1997, Amtrak shall operate without Federal
operating grant funds appropriated for its benefit.”
27Id. at § 204(c)(1)&(2).
28Id. at § 205.
temporary additional funding. Instead, Congress expressly forbade preparation of a
The Amtrak Reform and Accountability Act also made employee protection
reforms by establishing special arbitration and mediation procedures under the
Railway Labor Act and by extinguishing specified employee protective arrangements
and severance benefits applicable to employees of Amtrak.30 It expressly renders
inapplicable 11 U.S.C. § 1172(c) to Amtrak employees.31 Amtrak’s labor costs,
however, continue to represent a major segment of its operating cost.
National Transportation Policy Versus Debt Repudiation. Congress
effects national transportation policy – including rail transportation policy – pursuant32
to its constitutional power to regulate interstate commerce. Congressional authority
to legislate on the subject of bankruptcies is derived from the Bankruptcy Clause.
The provisions of Title 11 governing railroad reorganization generally permit all
manner of sale, transfer, abandonment, and ultimately dissolution of a railroad carrier
and its assets. The Bankruptcy Code has not historically operated as an obstacle to
Congress’ authority to effect the restructuring of railroads under its commerce clause33
The Bankruptcy Clause does, however, require that laws on the subject of
bankruptcies be “uniform.” The subject matter of bankruptcy is defined as “the
subject of the relations between an insolvent or nonpaying or fraudulent debtor and
his creditors, extending to his and their relief.”34 The U.S. Supreme Court has
interpreted this to mean that enactment of a law to reassign priorities and
distributions to creditors in a single, named debtor’s bankruptcy violates the35
Bankruptcy Clause. What implications do these principles have for Amtrak?
When people ask what will happen if Amtrak is liquidated, there are two
components to the question: what will be the future of intercity passenger rail
29The FY2002 Department of Defense Appropriations Act, P.L. 107-117, § 1102 provides
that “[n]o appropriated funds or revenues generated by the National Railroad Passenger
Corporation may be used to implement § 204(c)(2) of Public Law 105-134 until the
Congress has enacted an Amtrak reauthorization Act.”
30P.L. 105-134, §§ 141-142.
31Id. at § 142(d). Section 1172(c)(1) of the Bankruptcy Code provides that if the Surface
Transportation Board approves a provision under the reorganization plan allowing for the
transfer of, or operation of or over any of the debtor’s rail lines by an entity other than the
debtor, or a successor to the debtor, then the Board must require the rail carrier to provide
a “fair arrangement at least as protective of the interests of employees as that established
under section 11347 of title 49.” Section 11347, however, was omitted in general
amendments to Title 49 U.S.C. in 1996. Similar provisions were enacted at 49 U.S.C. §
32Art. I, § 8, cl. 3.
33See Regional Rail Reorganization Act Cases, supra note 4.
34Railway Labor Executives’ Ass’n v. Gibbons, 455 U.S. 457, 458 (1982).
service? And, what will happen to Amtrak’s assets and creditors, including its
employees? With regard to the former, Congress has many options to deal with the
restructuring of intercity passenger rail service (although many may be premised
upon continuing federal subsidies).36 Few of these are foreclosed by the Bankruptcy
Code requirements with respect to railroad liquidation. As to the latter, the General
Accounting Office noted in its 2002 report that the liquidation of Amtrak would
presumably result in losses by creditors, including the federal government. It could
have a financial impact on participants in the railroad retirement and unemployment
systems. Passenger rail service could be cut back or discontinued. However, many
of these assumptions are premised on a hypothetical liquidation of Amtrak in a public
policy vacuum, absent consideration of as yet unknown but probable supplementary
law or action to salvage passenger rail service.
The only major constraint upon Congress with respect to a liquidation of
Amtrak inheres in the requirement that bankruptcy laws be “uniform.” Assuming
that a congressional mandate to liquidate Amtrak is not premised on the desire to
alter or otherwise impair creditors’ rights, this constitutionally-based requirement
arguably has greater impact on the legislative approach Congress may take with
respect to Amtrak’s insolvency than on Congress’ prerogatives with respect to
transportation policy and a restructuring of intercity passenger rail service. For
example, though ambiguous, the Amtrak Reform and Accountability Act appears to
contemplate congressional action to effect a liquidation through free-standing
legislation. Congressional enactment of legislation to liquidate a single, named
debtor, i.e., Amtrak, would be more likely to run afoul of the Bankruptcy Clause than
liquidation under the U. S. Bankruptcy Code. Likewise, the provision in the Reform
Act that makes 11 U.S.C. § 1172(c) inapplicable to Amtrak’s employees is
constitutionally suspect if it has the actual effect of reassigning creditor rights within
a named debtor’s bankruptcy. Amending the Bankruptcy Code for the sole purpose
of reducing the rights of Amtrak employees could violate the uniformity
Nevertheless, it is unlikely that the requirements of railroad reorganization or
liquidation will be the vehicle for national transportation planning. Congressional
collaboration in a transportation restructuring plan that has Amtrak’s liquidation
under the Bankruptcy Code as a mere component is a more likely scenario.
36See CRS Report RL30659, Amtrak: Overview and Options, by David Randall Peterman;
see also, Intercity Passenger Rail: Decisions on the Future of Amtrak and Intercity
Passenger Rail Are Approaching (GAO/T-RCED-00-277, Sept. 26, 2000). See also, CRSth
Issue Brief IB10032, Transportation Issues in the 108 Congress.
37The Amtrak Reform Act effected employee benefit reforms. The actual impact of 11
U.S.C. § 1172(c) in a bankruptcy filing is beyond the scope of this report. In many
instances, statutory references are made to repealed statutes. Further, whether implementing
the provision would have a material de facto impact on Amtrak employees is not considered.