Q&A About an Amtrak Bankruptcy

In summary:

Bankruptcy is a cumbersome procedure that may be expected to generate inefficiencies and require expenditure of significant resources for legal fees. All decisions are slowed down as both the Trustee and potentially the Bankruptcy Judge have to rule. The trustee, his accountants and appraisers and consultants must be paid. Moreover if the United States Government is held responsible for all unpaid debts including labor protections, and injury claims, the cost to the United States Treasury could be astronomical.

Q: Can Amtrak operate the way that the Airlines have been able to under Bankruptcy Protection?

A. Amtrak can operate as debtor in possession under a chapter 11 bankruptcy. However creditors can move to convert to a Chapter 7 or to remove Amtrak's management control. Since Amtrak's assets are insufficient to pay off all debts, unsecured creditors are likely to want to protect themselves by pushing to liquidate immediately. Unsecured creditors, particularly the Export-Import Bank of Canada, may want to hold off a bit if they can continue to get lease payments on the equipment they have financed (the Acelas, Viewliners and Superliners) since disposal of their security might not get them much in a distressed sale. This is because it is unclear who besides VIA Rail Canada, Inc. would want this much rolling stock.

The big problem will be the lack of operating cash, which is why Amtrak would file in the first place. No bank would loan Amtrak more funds when it has no core operations that are profitable.

Amtrak might be able to sell some real estate assets, but that requires bankruptcy approval, would take some time, and would be at distressed value. Thus, it would be too little and too late to meet payrolls at the onset of the bankruptcy.

Bankruptcy court actions require notification of all creditors of a hearing date. This means that no decisions are instantaneous, and many may require a month or so.

When Amtrak’s current cash is exhausted, a government guaranteed loan would be required to maintain operations. But if the Government wanted to appropriate funds or guarantee a loan, it would be cheaper to do so before the bankruptcy rather than afterwards (even before considering the fact that the government would much control over decisions in bankruptcy).

Any successor in interest would have to bargain with the same unions under the Railway Labor Act for any new contracts, and the Railroad Retirement and Federal Employers Liability Acts would still apply.

Q: What would happen if Amtrak could not complete a successful plan?

A. Amtrak would be forced to liquidate. Since none of Amtrak’s core operations are profitable, shedding all passenger operations and reducing itself to a tiny real estate operation would the only feasible plan. This would not appear to satisfy any continuing public purpose.

Q: What will happen to the obligations to Amtrak's Employees?

A. They are protected as preferred creditors up to a specific amount of their wages pre-bankruptcy. Their post-bankruptcy wages would be (until they are let go) administrative expenses. For purposes of labor protection payments, employees would be treated as unsecured creditors. They might be ahead of the obligations to the United States Government, because it would be argued that the US Government forced the bankruptcy and should not benefit from its tortuous actions.

Q: Are the commuter operations protected by the $360 Million controlled by the STB?

A: The $360 million is merely a budget request by the Bush Administration. It remains to be seen what legal requirements might apply if money is appropriated. In theory the freight or commuter railroads could be directed to assume operation of the Northeast Corridor and specific commuter services. However when Amtrak is the operator of the Commuter Operation, there may not be anything to take control with. In addition, there may be considerable legal and administrative costs to effect a formal transfer of responsibility. Where an Amtrak asset would depreciate in value by use of an outside party, a motion to stay the transfer would be made to the bankruptcy judge, who would after notifying all creditors make a decision. (In the meantime no action can be taken about that asset.)

Moreover the Judge may not allow the asset to be used if he/she agrees the transfer would reduce the value of the transferred object.

Ed Note: The above refers to the Fiscal 2006 Administration effort to bankrupt Amtrak and provide only $360 million for continued commuter rail services in the Northeast Corridor, Chicago, and Los Angeles.

Q: What happens if Amtrak is not the debtor in possession but a trustee is appointed?

A. The Trustee must make all of the decisions about preserving value for the benefit of creditors. Traditionally this means adding another layer of bureaucracy since the Trustee hires someone to handle the day to day operations of the business. When it becomes time to sell assets, permission of the Bankruptcy Judge is required who after notifying all of the creditors issues a decision several months later.

The trustee is supposed to represent the interests of the unsecured creditors. Typically these are the vendors whose bills have not been paid, but also would include large, secured creditors to the extent that their security was insufficient to satisfy all of their claims. Most Amtrak assets are already subject to liens. Equipment that is not so subject would be sellable only for a fraction of true worth, the Trustee in order to generate funds to pay his own expenses including his fee as trustee, must generate cash by liquidating Amtrak's real estate operations since they could conceivably render the largest return to true value.

The trustee must get the highest possible price for the asset. If this means selling the Waterfront property for homes and ripping up the track for scrap, the trustee must pursue this possibility after he/she has decided to liquidate that asset.

Because of the complexity of Amtrak's operations, the trustee must hire appraisers and accountants (as administrative expenses) to determine what assets need to be sold to be satisfy the creditors. It will take months to determine and those assets must be secured.

Q: Will the cost of the Bankruptcy be cheaper than Amtrak current operations for the benefit of commuter and freight services?

A: No. Very few of the costs of operating and maintaining the Northeast Corridor that are currently borne by Amtrak’s intercity passenger service would be eliminated. In addition, it is always more expensive when an outside party has to take over an existing operation. Key people move on to other jobs. Contacts with suppliers are disrupted. The trustee, his accountants and appraisers need to be paid. Purchases are emergency and therefore in small quantities (no volume discounts). Last, if the Bankruptcy Judge has to make a decision, all creditors have to be notified and eventually a decision will be made.

Q: What role will Congress have once the bankruptcy is declared?

A: Congress can appropriate money and guarantee loans, but this will take time. They can not affect the distributions of assets, order of priories, or the appointment of trustees, nor can they influence the business decisions of the bankruptcy trustee.

Theoretically, they could set up a new entity to purchase some or all of Amtrak’s assets. In the meantime, employees would disappear, equipment would depreciate, be sold or just disappear. The new entity would not have Amtrak’s statutory right of access to freight railroads at incremental cost. [Amtrak was granted this right originally because the freight railroads as quid pro quo were allowed to get out of the passenger business; this time they would not get anything in return.]

Q: Could the Trustee do a partial liquidation of the system?

A: A partial liquidation would leave the remaining operation with much higher debt, with little possibility of the company being able to pay. More importantly, it would still be a deficit operation that requires public funding.

Q: Can any of Amtrak's debts be eliminated?

A: Yes, if the company is liquidated or sold to a new entity, then what ever is not sold plus any cash received will be distributed first to the Trustee, his appraisers and accountants for their fees, then to employees owed wages then for real estate taxes and state and federal income taxes and finally unsecured creditors. Of course this distribution will take place only after notifying all of Amtrak's creditors and then the Bankruptcy judge issuing his/her decision several months later.

The real problem is who gets burned by having their debts discharged and what, if anything, is left of intercity passenger rail service. Obviously the Federal Government loses its equity in Amtrak along with the DOT Loan. Canada risks having one of its government banks go bankrupt. Persons with legitimate claims against Amtrak for injuries suffered will have their claims drastically reduced and significantly delayed since the bankruptcy judge may have to (after hearing and notification of Amtrak's creditors) approve these proposed settlements. Small business who sold food and equipment and parts to Amtrak will also be affected.

Q: How would this bankruptcy affect the freight railroads?

A.
Money owed the Freights will be unsecured claims taking years to be paid if at all.
Amtrak would no longer indemnify against any injury where a suit has been filed against a freight railroad arising out of a passenger operation, regardless of fault.
Railroad Retirement funds would be restricted because Amtrak is no longer paying. Rates that the freight railroads pay per worker would have to be increased to keep the system solvent.
Some Amtrak Employees can claim seniority rights with their old freight employers. If they bump a current employee, the freight railroad might have to reimburse the bumped individual.

Q: What effect would the bankruptcy have on persons holding tickets for the period after the bankruptcy is filed?

A: They would become unsecured creditors of Amtrak unless Amtrak is able to honor those tickets. This raises an interesting question of preference since a Ticket Holder is getting full compensation while other unsecured creditors are likely to receive 0% percent of their claims.

Q: What effect does a threat of bankruptcy hold?

A: Depending on how seriously the threat is taken, the result could be a serious cash-flow problem for Amtrak. Passengers would have an incentive to wait to the last moment before purchase the tickets. Potential creditors would want cash transactions, and secured creditors more security. Insolvency (the inability to meet current debts as they become due) may come sooner rather than later.

Q: What is the potential of Amtrak making capital improvements such as repairing a bridge in Connecticut or the life safety items in the New York City Tunnels?

A: If funding is not provided, the work could not be done.