City of Ottumwa v. STB ( 1998 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 97-1848
___________
City of Ottumwa; Patrick C. Hendricks; *
Joseph C. Szabo, *
*
Petitioners, *
v. *
*
Surface Transportation Board; United *
States of America, *
*
Respondents, *
*
I & M Rail Link, LLC; Soo Line *
Railroad Company, *
*
Intervenor on Appeal.
___________ On Petition for Review
Of an Order of the Surface
No. 97-2211 Transportation Board.
___________
United Transportation Union, *
*
Petitioner, *
*
v. *
*
Surface Transportation Board; United *
States of America, *
*
Respondents, *
*
I & M Rail Link, LLC; Soo Line *
Railroad Company, d/b/a Canadian *
Pacific Railway, *
*
Intervenor on Appeal. *
___________
No. 98-1369
___________
City of Ottumwa; Patrick C. Hendricks; *
Joseph C. Szabo, *
*
Petitioners, *
v. *
*
Surface Transportation Board; United *
States of America, *
*
Respondents, *
*
Soo Line Railroad Company; I & M *
Rail Link, LLC; United Transportation *
Union, *
*
Intervenor on Appeal. *
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___________
No. 98-1507
___________
United Transportation Union, *
*
*
Petitioner, *
v. *
*
Surface Transportation Board; United *
States of America, *
*
Respondents. *
*
Soo Line Railroad Company; *
*
Intervenor on Appeal. *
___________
Submitted: February 11, 1998
Filed: August 20, 1998
___________
Before FAGG, JOHN R. GIBSON, and MURPHY, Circuit Judges.
___________
JOHN R. GIBSON, Circuit Judge.
In this consolidated case, the City of Ottumwa, et al., and the United
Transportation Union seek review of several related orders issued by the Surface
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Transportation Board1 concerning I&M Rail Link's purchase of railroad line and
trackage rights from Soo Line Railroad Co., d/b/a Canadian Pacific Railway. For the
reasons set forth below, we deny Ottumwa's and United's petitions for review.2
Dennis Washington created a non-carrier corporation, I&M Rail Link, to acquire
from Soo certain rail lines (KC Mainline and Corn Line) and related trackage rights in
Iowa, Illinois, Minnesota, Missouri, Wisconsin, and Kansas. On January 14, 1997,
I&M filed a verified notice of exemption under the Board's non-carrier class exemption
(49 C.F.R. §§ 1150.31-35 (1997)) to exempt its proposed acquisition of Soo's rail lines
and trackage rights from the regulatory requirements of 49 U.S.C. § 10901 (1994).
Because Washington already owned a controlling interest in another railroad,
Montana Rail Link, Washington filed a notice of exemption under the Board's non-
connecting carrier class exemption (49 C.F.R. § 1180.2(d)(2) (1997)) to exempt his
proposed control of Montana Rail Link and I&M from the regulatory requirements of
49 U.S.C. § 11323 (1994).3
1
The ICC Termination Act of 1995, Pub. L. No. 104-88, 109 Stat. 803
(1995), abolished the Interstate Commerce Commission and transferred certain rail
functions to the Surface Transportation Board.
2
The day before argument in these cases, we ordered that 98-1369 be
consolidated with 97-1848 and 97-2211. After argument, on February 26, 1998,
United Transportation Union also filed a Petition for Review directed to the Board's
order in Finance docket No. 33350, entered February 3, 1998, the same order that
was under review in 98-1369. The Board suggested consolidating and Soo Line
filed a Motion to Consolidate and Intervene. All of the parties briefed the issues
concerning Finance docket No. 33350 in 98-1369. Accordingly, we grant the
Motion to Consolidate and the Motion to Intervene.
3
Montana Rail Link also filed a notice of exemption under 49 C.F.R.
1180.2(d)(2), seeking authority to control I&M following consummation of the I&M
acquisition transaction. However, Montana Rail Link simultaneously filed a motion
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Both Ottumwa and United petitioned the Board to revoke I&M's non-carrier
class exemption and Washington's non-connecting carrier class exemption. On April
1, 1997, the Board denied the petitions to revoke and ordered the I&M acquisition
exemption and the Washington control exemption to be effective April 4, 1997.
On April 3, 1997, Ottumwa requested a stay of the Board's April 1 decision
pending judicial review, arguing primarily that the Board had to determine prior to the
sale whether Soo would control I&M if it chose to exercise an option in the contract
giving Soo the right to acquire up to a one-third interest in I&M. That option, if
exercised, would allow Soo to appoint two of seven managers to I&M's board of
managers. The Board, on that same day, denied the stay request.
In denying the petitions to revoke and the stay request, the Board declined to
make a final ruling on the control issue until Soo actually exercised its purchase option.
On April 3, 1997, Soo exercised its option to acquire a one-third interest in I&M,
and immediately placed those shares in a voting trust. On May 29, 1997, Soo filed a
petition for a declaratory order requesting the Board to find that Soo's acquisition of a
one-third interest in I&M does not require prior approval under, or exemption from, the
carrier control provisions of 49 U.S.C. §§ 11323. The Board issued a procedural
schedule permitting the parties to file additional evidence and argument on the control
issue. On February 3, 1998, the Board issued a decision concluding that Soo's
acquisition of a one-third ownership interest in I&M does not constitute control and
does not require prior approval under 49 U.S.C. § 11323.
to dismiss its notice of exemption for control of I&M, asserting the Montana Rail
Link/I&M relationship would be such that Montana Rail Link would not control
I&M. The Board granted Montana Rail Link's motion to dismiss in its April 1,
1997, decision.
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Both Ottumwa and United petition this court to review the Board's April 1, 1997,
decision allowing the transfer of railroad line and trackage rights from Soo to I&M, as
well as the Board's February 3, 1998, decision finding that Soo does not control I&M.
We first consider Ottumwa's and United's arguments directed at the Board's April
1, 1997, decision, and then consider their arguments directed at the Board's February
3, 1998, decision.
I.
United argues that the Board erred in its April 1, 1997, decision (I&M
Acquisition) finding that the trackage rights involved are "incidental" to the overall
transaction. United argues that the trackage rights are not incidental to the overall
transaction and therefore the Board should have required I&M to seek approval of the
trackage rights in a separate proceeding. We reject United's argument.
Acquisitions of rail lines by a non-carrier are subject to the regulatory
requirements of 49 U.S.C. § 10901.4 A non-carrier may bypass the pre-approval
requirements of 49 U.S.C. § 10901 by filing with the Board a notice of exemption
under 49 C.F.R. §§ 1150.31-35. This exemption expressly includes the acquisition of
"incidental" trackage rights in connection with a transaction under section 10901. 49
C.F.R. § 1150.31(a)(4). The Board concluded that the trackage rights I&M obtained
from Soo are "incidental" trackage rights and considered them together with the
railroad lines in denying United's petition to revoke the I&M acquisition exemption.
We will set aside the Board's finding that the trackage rights are incidental only
4
Under this section, a "person other than a rail carrier" may acquire a railroad
line only if the Board issues a certificate authorizing the acquisition. See 49 U.S.C.
§ 10901(a)(4).
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if that finding is arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with the law. 5 U.S.C. § 706(2)(A) (1994). The regulations state that:
"[i]ncidental trackage rights include the grant of trackage rights by the seller, or the
assignment of trackage rights to operate over the line of a third party that occur at the
time of the exempt acquisition." 49 C.F.R. § 1150.31(a)(4). The trackage rights at
issue here were granted in conjunction with and facilitated the overall acquisition of the
rail lines and thus fall squarely within the regulations' definition of incidental trackage
rights. See Indiana & Ohio Railway Company--Acquisition Exemption--Lines of the
Grand Trunk Western Railroad Inc., STB Finance Docket No. 33180, 1997 WL 40912,
*5 (I.C.C., Feb 3, 1997 ). The Board concluded that the trackage rights I&M obtained
from Soo "are incidental because they are related to the sale of the Main System line
segments, the KC Mainline and the Corn Lines." The Board did not abuse its
discretion in classifying the trackage rights as incidental trackage rights, nor was its
decision arbitrary, capricious, or otherwise not in accordance with the law.
United also argues that the Board was arbitrary and capricious in failing to rule
in its April 1, 1997, decision whether Soo's option to acquire up to a one-third interest
in I&M would cause Soo to control I&M. United argues that the Board had no
reasonable basis to defer this determination to a later declaratory order proceeding.
This argument is without merit.
In its notice of exemption, I&M advised the Board that I&M was granting Soo
the option to acquire up to a one-third interest in I&M which would allow Soo to
appoint two of seven directors to I&M's board of directors. In deferring the minority
control issue, the Board noted that before attempting to exercise the purchase option
Soo would seek a declaratory order indicating that its ownership would not constitute
control of I&M. Pending that determination, Soo would place the one-third interest in
a voting trust. The Board said that it would:
evaluate the implications of [Soo's] minority interest at such time as [Soo]
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institutes a declaratory order proceeding; and, if we determine that such
an interest, either alone or in combination with other factors, would allow
[Soo] to control I&M, [Soo] will be required to divest itself of that
interest or obtain authority from us to exercise that control.
The purchase agreement further provided that if the Board determined that the interest
would cause Soo to control I&M, then Soo would return the shares to I&M.
Given this setting, the Board was well within its discretion in deferring the issue
until such time as Soo actually exercised the purchase option. At the time of the April
1 decision, neither Soo nor I&M proposed to take any action that required immediate
resolution of the purchase option issue. The Board was not required to make a finding
on whether Soo, by owning a minority interest in I&M, would control I&M before Soo
even chose to exercise the option. Furthermore, the independent voting trust5
arrangement prevented Soo from holding the shares without first obtaining a
determination that purchasing a one-third minority interest in I&M would not cause Soo
to control I&M. We conclude the Board did not err in deferring the issue.
Lastly, Ottumwa argues that the Board has failed to render an analysis of the
relevant Rail Transportation Policy factors in ruling to deny its petition to revoke I&M's
non-carrier class exemption. Ottumwa argues that because the Board did not make any
specific findings concerning the fifteen criteria set forth in the Rail Transportation
Policy, its decision to deny Ottumwa's petition to revoke cannot stand. We reject this
argument.
5
The Board's regulations contain express provisions authorizing the use of a
voting trust in order to avoid an unlawful control violation. See 49 C.F.R. §§
1013.1-1013.3.
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Under 49 U.S.C. § 10502(d), the Board may revoke an exemption when
"necessary to carry out the transportation policy of section 10101." Section 10101, the
Rail Transportation Policy, sets forth general transportation policy objectives related
to promoting competition, efficiency, productive use of resources, and safety. 49
U.S.C. § 10101; see Minnesota Transportation Regulation Board v. United States, 966
F.2d 335, 343 (8th Cir. 1992). The Policy also explicitly states that it is the policy of
the United States Government to "minimize the need for Federal regulatory control over
the rail transportation system." 49 U.S.C. §10101 (2).
In its decision, the Board specifically noted that the proper inquiry when
evaluating a petition to revoke an exemption is whether regulation of the transaction is
necessary to carry out the Policy, focusing on the sections of the Policy related to the
underlying statutory section from which the exemption is sought. See Village of
Palestine v. I.C.C., 936 F.2d 1335, 1338-39 (D.C. Cir. 1991); Winter v. I.C.C., 992
F.2d 824, 825-26 (8th Cir. 1993). The Board then concluded, without discussing any
specific section of the Policy, that "Because we find . . . Ottumwa [has] failed to
demonstrate that the I&M acquisition . . . should be revoked, we will deny the
petition[] to revoke."
Village of Palestine and Winter make clear that the Board is not required to
review each section of the Policy. Furthermore, we conclude that the Board was not
required to make specific findings on certain sections of the Policy in a case such as
this one where, in exempting the entire non-carrier class from the prior approval
requirements of 49 U.S.C. § 10901, the Interstate Commerce Commission found that
the proposed class exemption was consistent with the Policy, and that these
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transactions generally do not require regulation to implement the Policy. See Class
Exemption--Acq.--& Oper. of R. Lines Under 49 U.S.C. 10901, 1 I.C.C. 2d 810 (Dec.
19, 1985) (Class Exemption), aff'd Illinois Commerce Com'n v. I.C.C., 817 F.2d 145
(D.C. Cir. 1987); see also Minnesota, 966 F.2d at 341. This is particularly so because,
to obtain revocation of an exemption, the burden of proof was on Ottumwa to show that
regulation was required to carry out the Policy. See CSX Transp., Inc. -- Aban. -- in
Randolph County, WV, 9 I.C.C.2d 447, 449 (1992); Minnesota Commercial Ry. --
Trackage Rights Exempt. -- Burlington Northern R.R., 8 I.C.C. 2d 31, 35 (1991), aff'd
Winter v. I.C.C., 992 F.2d 824 (8th Cir. 1993). Here, the Board concluded that
Ottumwa failed to satisfy this burden. We have reviewed the record and conclude that
the Board did not abuse its discretion in so holding.
For the reasons set forth above, we affirm the Board's April 1, 1997 decision
denying Ottumwa's and United's petitions to revoke, and accordingly deny their related
petitions for review.
II.
We now turn our attention to Ottumwa's and United's petitions to review the
Board's February 3, 1998, declaratory ruling that Soo's acquisition of a one-third
ownership interest in I&M does not cause Soo to control I&M.
As stated earlier, in the Board's April 1 decision regarding the I&M acquisition
exemption (I&M Acquisition), the Board stated that it would evaluate the control
implications of Soo's minority interest in I&M after Soo exercised the option and
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instituted a declaratory order proceeding.
Soo exercised its option on April 3, 1997, immediately placed the shares in a
voting trust, and on May 29, 1997, filed a petition for a declaratory order requesting the
Board to find that Soo's acquisition does not require prior approval under, or exemption
from, the carrier control provisions of 49 U.S.C. §§ 11323. On February 3, 1998, the
Board issued a decision concluding that Soo's acquisition of a one-third ownership
interest in I&M does not constitute control and therefore does not require pre-approval
under 49 U.S.C. § 11323.
Ottumwa argues that the Board's bifurcation of the I&M acquisition transaction
and the Soo minority interest transaction resulted in a "deficient record" and "woefully
inadequate findings." To support this contention, Ottumwa alleges that the Board erred
by finding in the February 3 declaratory order decision that it had previously considered
and rejected in I&M Acquisition Ottumwa's claims regarding the Operating Agreement.
Apparently, Ottumwa is arguing that the record and findings are deficient
because in I&M Acquisition the Board indicated it was deferring consideration of the
Operating Agreement until the declaratory order proceeding. Then in its February 3
declaratory order decision, the Board stated, "In I&M Acquisition, we rejected claims
by [United] and Ottumwa that the marketing and operating agreements would give Soo
the power to control I&M." Thus, Ottumwa argues that the Board never properly
considered the terms of the Operating Agreement in deciding the issue of whether Soo
would control I&M after exercising its purchase option. This argument is entirely
without merit.
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In its Petition for Declaratory Order, Soo submitted to the Board a copy of the
Operating Agreement. The Board specifically dealt with the relevant provisions of the
Operating Agreement throughout the entire declaratory order decision, and made
repeated capitalized references to the "Operating Agreement."6 Furthermore, a
comprehensive reading of I&M Acquisition and the declaratory order decision makes
clear that when the Board stated that in I&M Acquisition it had rejected claims that
"the marketing and operating agreements would give Soo the power to control I&M,"
the Board was discussing various commercial arrangements (e.g., divisions agreement,
marketing agreements, etc.) between I&M and Soo that the Board had already
considered in I&M Acquisition. Although the Board used the phrase "operating
agreements," it was not referring to the "I&M Operating Agreement" which, among
other things, spells out the terms for Soo's exercise of its option to purchase a one-third
interest in I&M. The Board properly considered the Operating Agreement in its
February 3 decision and developed a sufficient record on the issue.
Ottumwa also argues that the Board erred "in finding an absence of record
support for [Soo]-Dennis Washington/MRL joint control of I&M" and that the Board
erred "in placing almost exclusive emphasis on control over day-to-day operations."
We reject these arguments.
Control is defined as "actual control, legal control, and the power to exercise
6
We will not catalogue the numerous references the Board made to the
Operating Agreement in its decision. Suffice it to say the Board thoroughly
considered, and rejected, Ottumwa's claims concerning the Operating Agreement.
See STB Finance Docket No. 33350, Soo Line Railroad Company--Petition for
Declaratory Order, 1998 WL 43797 (I.C.C., February 3, 1998).
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control through or by (A) common directors, officers, stockholders, a voting trust, or
a holding or investment company, or (B) any other means." 49 U.S.C. § 10102(3).
The existence of control is an issue of fact to be determined by the circumstances of
each case. See Rochester Telephone Corp. v. United States, 307 U.S. 125, 145-46
(1939). The Board's determinations concerning questions of control are entitled to
great deference and will not be overturned unless the decision is "arbitrary, capricious,
an abuse of discretion, or otherwise not in accordance with the law." 5 U.S.C. §
706(2)(a); see Chevron, U.S.A. v. NRDC, Inc., 467 U.S. 837, 842-43 (1984).
After reviewing the Board's decision, we conclude the Board did not err in
concluding that Soo, either alone or in conjunction with Montana Rail Link, would not
control I&M. Contrary to Ottumwa's assertions, the Board did not exclusively rely on
Soo's ability to control the day-to-day operations of I&M. The Board reviewed the
arrangements in place between Soo and I&M and concluded that I&M is controlled
solely by its majority owner, Dennis Washington. The Board noted that Dennis
Washington has the power to appoint five of the seven members of I&M's board, and
that the board has the sole right and authority to manage, control and make all decisions
affecting the business of I&M. The Board also considered the minority protections
afforded Soo in the Operating Agreement and concluded that these provisions merely
protect Soo's economic position. Ottumwa has not identified any facts that would lead
us to conclude the Board abused its discretion in reaching these conclusions.
Ottumwa and United raise various other arguments attacking the Board's
February 3, 1998, decision. We have considered these arguments and conclude that
they are without merit. Accordingly, for the reasons set forth above, we affirm the
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Board's February 3, 1998, decision and deny Ottumwa's and United's related petitions
for review.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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