B&A proceedings follow a strange course

An asset of immense value to the economy and citizens of Maine is being placed in jeopardy by a lack of official recognition of the public interest in its fate. The bankrupt Bangor & Aroostook Railroad System is a vital transportation link supporting industry and employment in a vast and rural area of the state, often referred to as, “the other Maine,” where forestry and farming are the principal economic drivers.

The B&A, as it is known, and five affiliates were placed under court protection after amassing unmanageable liabilities reported at $123 million under ownership by a Virginia-based, private holding company, Iron Road Railways Inc. These companies are Maine’s backbone railroads. The state must have them.

After seven years of operation in which there was negligible cash flow available for reinvestment – and during which nearly all the company’s assets were sold and leased back in order to survive – B&A and its affiliates were forced into bankruptcy by dissatisfied creditors.

In traditional commercial bankruptcies involving retailers or manufacturers, the trustee determines whether the debtor can be reorganized under existing management. If not, its assets typically are auctioned to the highest bidder under supervision of the court and the proceeds distributed to creditors in accordance with the priority of their claims. Certain classes of creditors may be paid in full, in part, or not at all, and shareholders usually are fortunate to receive anything for their equity in the business.

Railroad bankruptcies are different. Because of the importance of unique railroad franchises to dependent shippers and communities, rail carrier reorganizations require that, “the court and the trustee shall consider the public interest in addition to the interests of the debtor, creditors, and equity security holders.” The law “reflects a public policy that the operation of railroads as sound economic units should be achieved for the benefit of the public regardless of the interests of creditors and stockholders,” (see chapter 11 of the U.S. Bankruptcy Code).

Why, then, are the B&A proceedings following such a peculiar course? The trustee, appointed in January, has focused exclusively on one potential suitor, Rail World, a comparatively new enterprise with no rail properties in the United States (albeit a minority interest in the recently privatized Estonian state railways). Rail World proclaimed last August that it intended to buy most of the B&A System assets for as much as $62 million, but has yet to come forward with a firm financed offer at any price. The trustee’s public statements indicate that he plans to dispose of B&A’s assets as quickly as possible to the highest bidder; but has not actively solicited proposals from other parties.

More important, neither the trustee nor Rail World has advanced a reorganization plan that gives any substantive comfort to rail users, on-line municipalities, anxious employees, and public officials that a simple transfer of assets is in the public interest. “In Rail World We Trust” is not enough, given that firm’s nine-month history of glib talk and nonperformance. Its announced principals, though experienced rail executives, have not previously been associated in a common business endeavor.

The trustees’ responsibility vis-a-vis the public interest extends well beyond a sale of assets. What has been done to reduce B&A’s losses during the bankruptcy? Will the pension fund be excluded from the sale and who will answer for its abuse at the hand of Iron Road? Where did all the money raised in sale-leaseback transactions go? What is the fate of present B&A employees? How will municipalities owed more than $2 million ever recover their funds? Does the Iron Road experience confirm that the highest bidder isn’t necessarily the most desirable owner? Could the trustee inadvertently be

teeing up the next B&A bankruptcy?

The public interest will not be served by a repeat performance that leaves the B&A System in perilous financial condition and at risk of partial abandonment or another bankruptcy. Though state government is understandably reluctant to intervene in “private” commercial matters, this situation is very much

of a “public” nature.

I urge Gov. King, the Department of Transportation and concerned legislators to defend the public interest in accomplishing a sound transaction and competent management that will assure financially responsible operation of the B&A System for years to come.

Walter E. Travis’ 47 years of railroad experience includes 25 years at the B&A, 18 as its former president. Travis is a resident of Hampden.