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Rea Express Inc. v. United States and Interstate Commerce Commission

decided: September 16, 1977.


Petition to review orders of the Interstate Commerce Commission which (1) dismissed for lack of prosecution and application by the trustee in bankruptcy of REA Express, Inc. for permanent operating authority of a nationwide "Hub" system of express service, and (2) revoked the temporary operating authority previously granted for such service.

Waterman and Timbers, Circuit Judges, and William O. Mehrtens, District Judge.*fn*

Author: Timbers

TIMBERS, Circuit Judge:

On this petition to review orders*fn1 of the Interstate Commerce Commission (the Commission), the essential questions are whether the Commission acted arbitrarily and capriciously and abused its discretion in dismissing for want of prosecution the application of the trustee in bankruptcy of REA Express, Inc. (REA) under § 206(a)(1) of the Interstate Commerce Act (the Act), 49 U.S.C. § 306(a)(1) (1970),*fn2 for permanent operating authority of a nationwide "Hub" system of express service and at the same time in revoking the temporary authority previously granted to REA under § 210a(a) of the Act, 49 U.S.C. § 310a(a) (1970).*fn3

We hold that the Commission did not act arbitrarily and capriciously and did not abuse its discretion. Accordingly we deny the petition to review and affirm the order of the Commission.


(A) REA and the Hub System

"Express service", as defined by the Commission, entails the expedited carriage of goods upon firmly established schedules. The express carrier, whose services command premium rates, also must provide special handling for small parcels. REA Express, Inc., Application for ETA, 117 M.C.C. 80, 88-89 (1971); Railway Express Agency, Inc., Extension-Nashua, N.H., 91 M.C.C. 311, 324 (1962). During the first half of this century express service was provided as an adjunct of the operations of the nation's railroads. In 1929 the railroads joined together to establish Railway Express Agency, Inc. (Railway Express), a non-profit agency designed to operate all express services provided by the railroads under their joint ownership and control. The non-profit arrangement continued until 1969. In that year the participating railroads, which were dissatisfied with Railway Express' continuous losses, extricated themselves from its ownership. REA Express, Inc. v. Alabama Great Southern Railroad Co., 343 F. Supp. 851 (S.D.N.Y. 1972), aff'd, 412 U.S. 934, 37 L. Ed. 2d 393, 93 S. Ct. 2774 (1973). REA, the bankrupt herein, emerged as an independent company which carried on the business of Railway Express.

Upon the organization of REA in 1969, it provided express service with a routing system significantly different from the railroad oriented system which its predecessor had operated. The steady decline in railroad passenger service after World War II had forced Railway Express into increasing reliance on supplementary operations by motor carrier. By 1962 it had acquired nearly 1,700 separate motor carrier operating rights from the Commission. These piecemeal acquisitions left Railway Express with an uncoordinated and unmanageable system of interlocking rail and motor routes. It consequently decided that a fundamental restructuring of its routing system was necessary.

In 1968 Railway Express submitted to the Commission under § 206 of the Act an application for permanent operating authority for a "Hub" system of operations. The salient feature of such system was its selection of 24 central points or hubs for the dispatch and receipt of traffic. Each hub was connected with each other hub by a regular motor route or rail line-haul route. A "satellite" area, served exclusively by motor carrier, surrounded each hub. All traffic to and from locations within the satellite area moved via the hub city. Railway Express, pursuant to § 210a(a) of the Act, made the usual application for temporary authority pending the Commission's action on its application for permanent authority. The Commission found that Railway Express met the "immediate and urgent need" requirement of § 210a(a) for its Hub service and accordingly granted the temporary authority. Saginaw Transfer Co. v. United States, 312 F. Supp. 662 (E.D. Mich. 1970) (three-judge court); Estes Express Lines v. United States, 292 F. Supp. 842 (E.D. Va. 1968) (three-judge court), aff'd, 394 U.S. 718, 22 L. Ed. 2d 673, 89 S. Ct. 1469 (1969) (per curiam) (grant of temporary authority sustained).

Railway Express commenced Hub operations in 1968 under the temporary authority. It successor, REA, took no effective steps thereafter in prosecuting the permanent authority application. It relied on the temporary authority granted to Railway Express for continued Hub operations during the entire period of REA's existence. Once the Hub system was placed in operation under the temporary authority, it proved a disappointment to REA. As a result, in 1971 REA sought to abandon the Hub system and to replace it with a new system of irregular route service. In its new application for temporary authority REA represented that, despite strenuous efforts to implement the Hub system, it nevertheless had proved both "costly and inefficient for REA, and inadequate in providing service to the public." On August 9, 1971 the Commission denied the new application on the grounds that no immediate and urgent need had been demonstrated and the irregular route service proposed would be inconsistent with the concept of express service.

Although REA carried on under the temporary Hub authority, its actual operations departed significantly from those contemplated in the 1968 application. Referring to Hub operations in general, the Commission stated in its 88th Annual Report, at 54-55 (1974):

"The [Hub] concept proved to be inefficient, necessitating considerable exceptions to the basic operating plans. . . . The system today bears little resemblance to the original concept. . . ."

(B) REA's Bankruptcy and the Rexco Division

REA's operations continued to decline. As a result of the recession and other factors,*fn4 on February 18, 1975 it filed a petition for an arrangement under Chapter XI of the Bankruptcy Act in the Southern District of New York. The company continued operations as the debtor in possession until November 6, 1975. On that date it was adjudicated a bankrupt and ordered liquidated. Regular express services ceased the following day. Since then liquidation has been substantially completed. REA no longer has any operational capability.

Backing up for a moment to August 1975 - during the period of REA's unsuccessful reorganization proceeding - we come to the event which precipitated the Commission's proceedings here under review: establishing the Rexco Division of REA. Rexco amounted to little more than a brokerage business. Independent agents stationed at various locations east of the Rockies and acting on a commission basis solicited truckload traffic from shippers and then arranged for carriage in owner-operated trucks. A small Rexco office near Philadelphia solicited some business, but its chief function was billing shippers and paying agents and owner-operators. Rexco did not own or operate any equipment. It employed no drivers. It exerted little direct control over the operations carried on in its name. It failed to comply with the regular-route restrictions in REA's operating authorities and with the governing REA tariff. And by dispensing with fixed schedules and limiting itself to truckload shipments, Rexco lost any resemblance to the "express service" which REA was authorized to perform.

(C) Proceedings before the Commission and the Alltrans Application

Particularly on longer hauls, Rexco undersold competing irregular-route carriers. Its business grew rapidly. Apparently because Rexco was the only profitable REA operation, the REA trustee in bankruptcy on November 10, 1975 amended his embargo notice so as to exempt Rexco from the embargo on all REA operations which the trustee, upon taking office three days earlier, had placed on all traffic tendered to REA. By December 11, 1975, 18 of the motor carriers whose business Rexco had been diverting responded with complaints filed with the Commission seeking a cease and desist order against Rexco's unlawful operations. On December 1, American Trucking Associations, Inc. (ATA), one of the intervening respondents herein, filed with the Commission a petition seeking dismissal of the still-pending 1968 application for permanent Hub authority and concomitant revocation of the 1968 temporary authority for failure to prosecute the application in violation of Rule 247(f) of the Commission's General Rules of Practice, 49 C.F.R. § 1100.247(f) (1976). On April 5, 1976 the Commission entered an order consolidating all proceedings arising from the motor carriers' complaints and the ATA petition. Brada Miller Freight System, Inc. v. Rexco, Inc. and REA Express, Inc., Docket No. MC-C-8862.

On July 27, 1976, one day before the Commission set a date for oral hearings in the consolidated proceedings against REA, a bankruptcy judge in the REA Express, Inc. bankruptcy proceedings approved an agreement between the REA trustee and intervenor Alltrans Express U.S.A., Inc. (Alltrans) for the purchase of REA's outstanding permanent and temporary authorities. The agreement provided for down payment of $2.5 million and a guaranteed minimum rental and purchase price of $9.6 million. It also contemplated that by September 25, 1976 Alltrans would file applications with the Commission for transfer of REA's authorities pursuant to §§ 5(2)(a) and 210a(b) of the Act, 49 U.S.C. §§ 5(2)(a) and 310a(b) (1970).*fn5 See In the Matter of REA Holding Corporation (Manning v. Sowerwine), 558 F.2d 1127, 1129-30 (2 Cir. 1977) (dismissal of creditors Chapter X petition affirmed).

The essential elements of this agreement were the application for permanent Hub authority and the temporary authority, the continuing validity of which already had been drawn into question by ATA's petition of December 1, 1975. To assure the success of the Alltrans contract, the trustee therefore sought to delay the consolidated proceedings. On July 28 the Commission set the matter for hearing beginning August 30 before an Administrative Law Judge (ALJ). The trustee responded with a petition requesting a postponement of at least 45 days. He contended that adjudication of ATA's petition would frustrate the imminent transfer applications by Alltrans under §§ 5(2)(a) and 210a(b) ...

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