                                                          September 26, 1979


79-71     MEMORANDUM OPINION FOR THE
          ASSISTANT TO THE PRESIDENT FOR
          DOMESTIC AFFAIRS AND POLICY

          Interstate Commerce Commission—Directed Rail
          Carrier Service—Back Pay—49 U.S.C. § 11125
          (Supp. n , 1978)


   This confirms my oral advice that it is our opinion that the Interstate
Commerce Commission might determine that it was reasonable and
necessary for a carrier, providing service over The Rock Island routes pur­
suant to a directed service order, to pay back wages owing to The Rock
Island employees from The Rock Island in order to bring those employees
back to work for the directed carrier. We understand that The Rock Island
owes, but is presently unable to pay, back wages to its employees for work
performed during August. Apparently the employees have taken the posi­
tion that they will not return to work for a directed carrier or anyone else
until back wages have been paid.
   Section 11125(b)(3), 49 U.S.C. (Supp. II, 1978) specifically provides
that “ A directed carrier is not responsible, because o f the direction o f the
Commission, for the debts o f the other carrier.” Although this provision
expressly relieves the directed carrier o f any obligation to assume existing
debts o f the defaulting carrier, in our view it does not preclude a deter­
mination that assumption o f an existing debt is a permissible means of
assuring the resumption or continuation o f service.
   The provision protects the directed carrier from suits by creditors o f the
nonoperating carrier; the directed carrier does not become liable for a
defaulting carrier’s debts by virtue o f the Commission’s directed service
order. The provision, however, does not prohibit the directed carrier from
paying an existing debt o f the nonoperating carrier if such payment is re­
quired to enable the directed carrier to provide the service ordered by the
Commission. The language o f subsection (b)(3) quoted above is not a
limitation on the payment by the directed carrier o f the railroad’s existing
debts. However, the reimbursement provision, subsection (b)(5), is a
limitation on such payments.

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   T hat subsection requires a finding by the Commission that an expense
incurred by the directed carrier was “ incurred in or attributable to the
handling, routing, and moving the traffic over the lines o f the other carrier
for the period during which the action o f the Commission is effective”
before it can be included for reimbursement by the Governm ent. The
Commission must find that the payment here was necessary to move traf­
fic over The Rock Island line before it can consider the expenses incurred
to be reimbursable.
   It is im portant to note that The Rock Island’s financial posture will not
be affected by the directed carrier’s payment o f back wages; the directed
carrier simply will be substituted for the several employees as claimants
against The Rock Island for the back wages.
   The directed carrier would advance the back wages to the employees in
return for the employees’ assignment to the directed carrier o f their indi­
vidual wage claims against The Rock Island. The directed carrier, as
assignee, would then be in a position to recover these payments from the
trustee in bankruptcy for The Rock Island. Claims for wages are entitled
to priority in a railroad reorganization.
   The Commission, in our view, would be entitled to find that the directed
carrier’s costs associated with advancing the back pay to the employees,
and recovering the wage claims from The Rock Island, were necessary and
reasonable expenses in the com putation o f Governm ent reimbursement to
the directed carrier under 49 U .S.C . 11125(b)(5) (Supp. II, 1978). Should
the directed carrier be unable to recover from The Rock Island the full
am ount o f the back wage payments, the shortfall could also be reasonably
included in the directed carrier’s expenses, again assuming that the Com­
mission determines that the paym ent o f back wages was a necessary ex­
pense “ incurred in o r attributable to * *" * moving the traffic over [The
Rock Island] lines” during the period o f the directed service order.
   It should be pointed out that the Commission in its regulations issued
under § 11125 has provided that, in the event a directed carrier does not
need all the employees o f the nonoperating carrier to provide the directed
service, the cost o f term inating the unneeded employees is an obligation of
the nonoperating carrier and is not the responsibility o f the directed car­
rier. Ex Parte N o. 293 (Sub No. 3), Implementation o f P .L . 93-236, 248
I.C .C . 251, 273 (1975). These regulations on their face do not foreclose a
determ ination by the Commission that a directed carrier in the exercise of
sound business judgm ent might conclude that the payment o f the nonop­
erating carriers, obligations to employees incurred before the period of
directed service was, in fact, necessary to assure the resumption o f the
ordered service and therefore was attributable to moving traffic over The
Rock Island lines.

                                           Jo hn M . Harm on
                                    Assistant A ttorney General
                                                  Office o f Legal Counsel

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