Derailed by Bankruptcy: Life after the Reading Railroad

Derailed by Bankruptcy: Life after the Reading Railroad

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Overview

What happened when the US government stopped investing in railroads and started investing in highways and air travel? By the late 1970s, six major eastern railroads had declared bankruptcy. Although he didn’t like trains, Howard H. Lewis became the primary lawyer for the Reading Railroad during its legendary bankruptcy case. Here, Lewis provides a frank account of the high-intensity litigation and courtroom battles over the US government’s proposal to form Conrail out of the six bankrupt railroads, which meant taking the Reading's property, leaving the railroad to prove its worth. After five grueling years, the case was ultimately settled for $186 million—three times the original offer from the US government—and Lewis became known as a champion defender of both the railroad industry and its assets.

Product Details

ISBN-13: 9780253018663
Publisher: Indiana University Press
Publication date: 01/04/2016
Series: Railroads Past and Present
Pages: 160
Sales rank: 427,135
Product dimensions: 6.00(w) x 9.10(h) x 0.60(d)

About the Author

Howard H. Lewis, a graduate of Harvard Law School, has practiced law for over 50 years.

John C. Spychalski is Professor Emeritus of Supply Chain Management, Pennsylvania State University.

Read an Excerpt

Derailed by Bankruptcy

Life After the Reading Railroad


By Howard H. Lewis

Indiana University Press

Copyright © 2015 Howard H. Lewis
All rights reserved.
ISBN: 978-0-253-01871-7



CHAPTER 1

The Age of Innocence


My first experience with the Reading was learning in 1971 that we at ORM&H would be counsel for it in its recently filed reorganization, and wasn't that exciting? It didn't really excite me. From what I casually learned about the case, it seemed to be a litigation, not a corporate matter, and I expected to have little if anything to do with it.

In the winter of 1972–1973, my mentor, Herbert A. Fogel, who was in charge of the Reading account, decided to ascend to the federal bench, and shortly thereafter my managing partner, William Fuchs, asked me to look into the representation to make sure that our client was being serviced adequately. I dutifully reported that I sensed some unhappiness in my short meetings with Reading's staff and Drew Lewis, its active trustee, and that their affairs could stand some more hands-on legal representation. He turned to me and said, "OK, you're it."

"But Bill," I replied, "I hate trains."

"You'll learn to love them, Howard. Besides, you have enough independent means to be able to afford a large commitment of your time at low rates to something that will end one day with no follow-up."

"All right, I'll try, but only until I can find someone else."

At the time I thought I could go in and organize a team consisting of a corporate associate, a government liaison, and a litigator, all of whom would devote small amounts of their time to specific problems, while the Reading, under its own legal staff, would run itself and I could become essentially a figurehead. This was the first of many errors on my part, for I found that, like Br'er Rabbit and the Tar Baby, the more I touched it, the more it drew me in. Still, this was a gradual process. I remember going home after an early meeting and telling my wife that I had the Reading. She asked if I knew a lot about railroad law. "Nothing whatsoever," I told her. "They've got a legal department, and as trustees' counsel my job is sort of to look self-important, collect fees, and assign specific help for specific tasks."

Still, from those early months came the one decision of mine that really mattered to the eventual success of the enterprise. At that time, and earlier, there existed an attitude among those employed in large private law firms that the dregs of the profession ended up working for the government (federal, state, or local) or in corporate legal departments. This misconception has long since vanished, but it infected my two predecessors. Our first lawyer in charge of the account treated the Reading staff attorneys as virtual errand boys, fit only to get coffee, on the grounds, I suppose, that they were mere house counsel and, what is worse, that if they'd been any good at all, the railroad would not have gone bankrupt. His successor, the man who preceded me, employed a different tactic. He was the soul of courtesy and affability, but he had the habit of summoning the senior Reading lawyers to meetings in our offices at 8:00 am, at which he wouldn't appear until 7:00 pm. He would call in during the day, saying that he was tied up with Senator Hugh Scott (our then counsel to the firm) or John Bunting (then CEO of First Pennsylvania Bank) or some other mythological figure. Finally he arrived, made a few largely irrelevant comments, rescheduled the meeting for some later date, and then departed, thereby wasting the entire day of two pressured, busy men. As one of them said to me later, on being called forth to meet they simply grabbed whatever they could from their desks so that they could so something with their days.

By contrast, I was not terribly interested in asserting my own self-importance. It seemed to me that if we were to have any chance of success at all, I had to forge with Reading's lawyers a relationship of complete trust and confidence. They knew the property; the two top attorneys had over seventy combined years of railroad law experience. I would have been idiotic not to have tried for the greatest possible cooperation, which, I thought, could only be founded on mutual respect and courtesy. What I did not expect, but for which I will be forever grateful, was that the respect and courtesy ripened over time into a kind of love, such as a son has for a father.

I wanted to instill the idea that I was there to learn, not to bully; that I knew nothing really about the Reading and was dependent upon them for all the understanding of the operation I would need. The first sign of change in this relationship was in how, when, and where we met. I always came to their offices — where, after all, the papers and other personnel that might be needed were located — instead of summoning them to mine. I always tried to arrive early. I let it be known that I was anxious to meet with them to discuss what they thought was important, rather than summoning them to deal with my agenda, which would have been rather foolish since at the beginning I didn't know enough to formulate an agenda. The result of this attitude was that I developed two friendships and as close a professional relationship as I have ever had. By the end of the eight-plus years in which we were in daily contact I could tell by the tone of their voices when Lock or Bill said yes in support of some fool idea of mine even though they really meant no, and we would discuss it. Most often they were right.

As I remember, from a distance of now more than thirty years, Alfred (Bill) W. Hesse, the Reading's senior vice president and general counsel, and later president, and Lockwood (Lock) W. Fogg Jr., senior counsel and later vice president for law, I am struck by, among other things, how different they were from me. Perhaps it was a generational thing (they were both thirty years older than I was), but for whatever reason, they had a very different view of the law. They were both driven by a sense of the law in the abstract, a love of its formality and precision as a thing apart from the purposes it served. By contrast, I am more result oriented, ready to use all ethical means to effect an end. Physically, they were both thin, wiry men, prominently bespectacled; Bill was more outgoing and humorous, which showed in his face, while Lock was more obsessed with accuracy, which gave his face a kind of mask that only really disappeared after two Manhattans, when his fundamental kindness and joviality came to the fore.

I felt that as the trustees' lawyer my contact with Reading's management should be through and with its lawyers. I saw no reason to get independently close to Reading's other management, from Charles Bertrand, its president, to the senior vice presidents, let alone others further down the line. Indeed, I saw myself as becoming more of a nuisance than a help had I done so. On the other hand, I felt I had to get to know the trustees, my clients.

I had never met my namesake, Andrew L. Lewis Jr., until my first trustee-management meeting. I knew him by reputation as a powerful force in Pennsylvania's Republican Party and as Senator Richard Schweiker's campaign manager. When I did meet him he seemed a small, unassuming man with a politeness stemming from innate good manners, while at the same time projecting a sense of quick understanding and organizational control. Annoyingly, though two years older than I was, he looked younger, and there were a number of people involved in the case, including some lawyers for the government, who assumed I got the representation because I was his older brother. It took me some time before I recognized how able and forceful he was.

At an early meeting, Drew turned to me and said, "Howard, my co-trustee Dick Dilworth isn't feeling very well these days, so he's been missing some meetings lately. I want to take you over to his office so you can meet him." Dick Dilworth was for me a very different figure than the then-unknown Drew Lewis. In the late 1940s when I was twelve or thirteen, Dick Dilworth was an awesome presence. Already a legendary trial lawyer as head of his own powerful firm, he often used to meet late into the night in my parents' house at 1916 Spruce Street with Joe Clark, Walter Phillips, and others to plot the demise of the Republican machine's control of the city of Philadelphia. Until my bedtime, I used to make drinks, collect glasses, clean out ashtrays, and listen with rapt attention to the words of the great man. Time passed; I went to boarding school, college, graduate school, the army, and law school, and began my practice. He became district attorney, a brilliant reforming mayor for two terms, unsuccessful candidate for governor of Pennsylvania, and a dominant leader in Philadelphia whose reputation and influence extended far beyond the city. Our paths seldom crossed.

As Drew and I were walking from the Reading Terminal at Twelfth and Market Streets to the Dilworth office at 123 South Broad Street, I turned to him and said, "You know, Drew, I sort of know Mr. Dilworth. I'm not sure it's necessary for me to formally meet him."

"No, no," Drew said. "Come on — I want him to know you're on the team."

As we walked into his office, Dilworth turned toward us, and with a politician's sure instinct he recognized me immediately and said, "Howard, what are you doing here?"

"Well actually, Dick, I'm your lawyer." Before taking me by the hand and saying graciously, "That's wonderful — I'm sure you'll make a great addition," I'm certain I saw in his eyes the memory of the pimply-faced twelve-year-old kid passing drinks. Within six months, he was dead. (I like to think it was a case of post hoc, not propter hoc, but I've never been quite sure.) Upon his death, he was succeeded as trustee by Jo- seph L. Castle, a well-respected local banker who had done work as a court-appointed master for Bill Ditter, the judge in charge of Reading's reorganization, who chose him.

Soon afterward, in the spring and summer of 1972, my work for the Reading began to fall into a fairly easy routine, and I began to know a little bit about the cast of characters. The early work consisted chiefly of getting rather routine administrative petitions approved by the court: payment of attorneys' bills (other than mine, which were then subject to Interstate Commerce Commission approval); permission to sell some small parcels of property and lease others; permission to buy equipment; permission to pay consultants; and a host of other matters associated with running a railroad, which under Section 77 of what was then the Bankruptcy Act had to be approved by the court. The Reading staff, usually Lock Fogg or someone under his supervision, would prepare a batch of such petitions on a biweekly basis. I would review them and present them in court with a brief summary of my own. The judge would ask if anyone wanted to be heard on the matter, and when invariably no one did, he would approve them. Hardly a terribly challenging procedure; the only goal was to get the whole thing done as expeditiously as possible. Nevertheless, I will not forget my first appearances in this exercise, as they were also my first appearances in federal court — or indeed any court — other than the chambers of a bankruptcy referee, the predecessor to the bankruptcy judge under the new code. Small things troubled me. I really didn't know where I was supposed to sit — at which counsel table, on which side of the bench. I arbitrarily and instinctively picked the table nearest the door and was never questioned about it.

In retrospect, this period prior to the end of 1973 seems like that period of stillness and quiet that often precedes a major storm. I basically reacted to problems Lock and Bill presented to me, read and wrote a few contracts, handled a few more-than-routine petitions. I was not terribly committed to the client, nor were the trustees. Dilworth was dying and Drew was busy campaigning for governor of Pennsylvania. The operation more or less ran itself, continually at a loss.

There was one matter which was not routine. The Reading had a substantial passenger operation comprising a commuter service from central Philadelphia to its northern and western suburbs, which was a disastrously money-losing venture, and a single intercity passenger service from Philadelphia to Newark, which was uniquely profitable among American passenger rail services at the time. The Philadelphia-to-Newark run largely served New York's garment district, picking up its passengers in the morning from the stations near their homes in Jenkintown and Elkins Park and delivering them home at night; the bar car was extremely active on the way back, and was perhaps in large part responsible for the route's profitability. This intercity line was of no real concern, but the commuter service, by contrast, was an enormous problem; in the opinion of many it was the fundamental cause of the railroad's bankruptcy. In an effort to find a solution, the railroad had negotiated a document called the "Memorandum of Understanding" between itself and the Southeastern Pennsylvania Transportation Authority (SEPTA), the basic intent of which was to transfer to SEPTA the service and the rail lines over which it ran, in exchange for relief from the obligation of providing the service, including maintenance of the applicable right-of-way, but no additional money. By the time I arrived on the scene, enthusiasm for this project had waned, at least on the part of the Reading. Although the agreement had promised relief from financial hemorrhaging, it had several problems, which in a way epitomized the basic difficulty of the entire reorganization.

The lines which provided the passenger service also had freight service over them. And so, if SEPTA were to own the lines, what share of the freight revenues from the lines would it be entitled to? The answer to this would have been complex, since some traffic originated on the lines, some terminated there, and most simply passed over them as a connecting link to other points of the system. Further, the Reading, like other railroads in the region, was not a single entity but leased a good deal of its trackage from other entities under 999-year leases. Typically these companies, after entering into such leases, became shells with no obligations but to collect the rent and distribute it to their shareholders. As investments, they were prized by trust officers as having a slightly better return than government bonds and being just as safe. The Reading had four such: the Delaware and Bound Brook Railroad Company; the North Pennsylvania Railroad Company; the East Pennsylvania Railroad; and the Philadelphia, Germantown and Norristown Railroad Company (PG&N). In railroad parlance, they were all termed "underliers," companies that owned rights-of-way but did not conduct operations. All of them shared an office and a single corporate secretary, and three of them at this time shared a single law firm, though each had separate presidents and directors who received modest fees for even more modest effort. Indeed, the presidencies and directorships of these entities were plums awarded by the banks to well-born scions of proper Philadelphia families whose trusts were administered by the selfsame banks. With bankruptcy, however, the rent vanished, and the bank-appointed officers were thrust into activity.

When the rent ceased, the trust officers panicked and bailed out of the stock of these companies for peanuts. The bankers and the old ladies they serviced were replaced with aggressive, hard-nosed speculators and arbitrageurs who acted very differently from their genteel predecessors. Trying to get them in line behind a coherent plan of action proved difficult. Our new trustee Joe Castle, since he was a banker, volunteered to handle the problem. As an opening move, he set up a lunch meeting with Drew, himself, and Pat Cestaro and his colleagues at Oppenheimer and Company who controlled the North Penn, the largest of the underliers, with Bill Hesse invited along to help smooth things over. After the meeting, I asked Bill what happened. "Well, Howard," he said, "it didn't go too well. After half an hour of contention, Joe exploded, turned to Drew, and told him they couldn't deal with idiots like these and that they were leaving. Drew protested that he hadn't finished his bagel. Joe insisted, grabbed his briefcase, threw open the door, and stormed out. Unfortunately, it was the wrong door and he stormed into the broom closet. Mrs. Davis, the secretary for all the roads, turned to him and said, 'Joe, as long as you're in there, why don't you clean the place up?' Then we all left, somewhat deflated and defeated."


(Continues...)

Excerpted from Derailed by Bankruptcy by Howard H. Lewis. Copyright © 2015 Howard H. Lewis. Excerpted by permission of Indiana University Press.
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Table of Contents

Foreword by John C. Spychalski
List of Abbreviations
List of Important Names
Introduction
1. The Age of Innocence
2. The Gathering Storm
3. A Time of Waiting
4. The Beginning
5. The Plot Thickens
6. Fear and Exhaustion
7. Detailed Case Preparation
8. The Times That Try Men’s Souls
9. The Rail Use Case: Ours and the Government’s
10. The Government’s Case
11. End Game
Epilogue
Notes

What People are Saying About This

author ofThe Men Who Loved Trains - Rush Loving

Derailed by Bankruptcyshould be required reading in every law school, especially for students who aspire to become corporate attorneys. Howard H. Lewis provides valuable insights into the creation of Conrail and interesting observations of Drew Lewis before he became chairman of the Union Pacific.

Senior Vice President at Norfolk Southern (retired) - Jim McClellan

Lewis has done the impossible—written an engaging and very human story about a railroad bankruptcy. I was deeply involved in the great railroad crisis of the early 1970s while at the FRA and USRA but still learned a lot from Derailed by Bankruptcy. This book is essential reading for those interested in a turbulent time when freight railroading came close to being nationalized.

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