Chicago, M., St. P. & P. R. Co., Matter of, 79-1371

Citation632 F.2d 45
Decision Date16 October 1980
Docket NumberNo. 79-1371,79-1371
PartiesIn the Matter of CHICAGO, MILWAUKEE, ST. PAUL & PACIFIC RAILROAD COMPANY, Debtor. Appeal of APALACHICOLA NORTHERN RAILWAY COMPANY et al., Petitioners-Appellants, v. The FIRST NATIONAL BANK OF CHICAGO, Trustee, et al., Respondents-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)

Milton L. Shadur, District Judge, Chicago, Ill., for respondents-appellees.

Edmund J. Kenny, Winston & Strawn, Chicago, Ill., for petitioners-appellants.

Before FAIRCHILD, Chief Circuit Judge, VAN DUSEN, Senior Circuit Judge, * and BAUER, Circuit Judge.

BAUER, Circuit Judge.

This appeal presents for reconsideration the issue previously addressed by this Court in In re Chicago, Rock Island & Pacific Railroad Company, 537 F.2d 906 (7th Cir. 1976), cert. denied sub nom. Gibbons v. Atchison, Topeka & Santa Fe Railway Co., 429 U.S. 1092, 97 S.Ct. 1102, 51 L.Ed.2d 537 (1977), in which we resolved a conflict of statutory authority between the Bankruptcy Act and the Interstate Commerce Act in favor of the power granted to the Interstate Commerce Commission. Petitioners-appellants in these reorganization proceedings appeal from the order of the district court denying their request to obtain a preferential payment of certain claims asserted by the petitioners against the estate

of the debtor, the Chicago, Milwaukee, St. Paul & Pacific Railroad Company. The district court held that under the standards set forth by this Court in Rock Island the petitioners were not entitled to a priority over the claims of other general creditors of the debtor. We affirm
I

On December 19, 1977, the debtor filed a voluntary petition for reorganization under Section 77 of the Bankruptcy Act, 11 U.S.C. § 205. On December 20, 1977, the district court entered its first order in the reorganization proceedings, directing the debtor to pay all per diem charges for the lease of railroad freight cars that became due on or after February 1, 1978, but directing payment of per diem charges coming due prior to February 1, 1978 only "as promptly as may be practicable as the financial ability of the debtor shall permit."

On December 27, 1977, seventeen trunkline railroads filed a petition seeking to amend that order to provide for the priority payment by the debtor, on an installment basis, of per diem balances owed to those creditors for the pre-reorganization use of their freight cars. On January 23, 1978, the district court granted the petition. Subsequently, on May 30, 1978, the district court further amended its order by directing a similar priority of payment for pre-reorganization per diem balances owed by the debtor to three additional trunkline railroads.

On September 12, 1978, petitioners-appellants, representing twenty-four shortline railroads, requested the district court to amend its order to permit a priority of payment on an installment basis of approximately $423,000.00 in pre-reorganization per diem balances due to them by the debtor for its use of petitioner's freight cars. Neither the trustee nor the Interstate Commerce Commission opposed the petition, but it was opposed by the respondents-appellees in their capacities as indenture trustees and general creditors of the debtor. Respondents opposed the petition on the ground that the petitioners did not own the railroad cars against which the per diem rentals were assessed, but instead held them as lessees of Itel Corporation, a non-railroad investor. Under the terms of petitioners' "non-equity" leases with Itel, the freight cars bear the name and identifying insignia of the respective shortline railroads, but all other indicia of ownership are vested in Itel. Itel receives the benefits of all warranties on the cars, performs all record-keeping functions, pays all costs, expenses and fees incurred by the use and operation of the cars, and reimburses the lessee for all taxes, assessments and charges the lessee pays on account of the leased cars.

Moreover, Itel is entitled to all payments accruing to the shortline railroads for the use of the cars by other railroads to the extent that the annual utilization of the cars is less than or equal to ninety percent of the days the freight cars are on lease. The shortline railroads receive income for their own accounts only if the car utilization exceeds the ninety percent base rental, and even then receive only one-half of the payments in excess of the base rental with the balance payable to Itel.

Based on the realities of the financial and operating arrangement between the petitioners and Itel, the district court concluded that the priority permitted in Rock Island was not warranted in this case and accordingly denied the petition. However, the court did allow the petitioners the opportunity to show entitlement to payment for up to five percent of the amounts claimed, which would be the maximum amount the shortlines would receive if the cars were completely utilized by other carriers.

II

On appeal, the petitioners contend that the controlling authority of Rock Island mandates reversal of the order appealed from denying their petition for a priority payment. Respondents, of course, contend that Rock Island is inapposite, except to the extent that it entitles petitioners to a five percent payment of the net per diem balances. **

In Rock Island, this Court determined that an accommodation between the objectives of the Bankruptcy Act and the Interstate Commerce Act must be made. In that case, a conflict arose between the authority of the reorganization court to determine the priority of claims asserted against a bankrupt railroad and the authority of the Interstate Commerce Commission to require a car-user railroad to pay pre-reorganization per diem charges owed to a car-owner under rules and regulations promulgated by the Commission. We concluded that the power of the reorganization court to determine priorities had to yield to the Commission's authority over car service. 537 F.2d at 910-911.

In reaching this conclusion, we reviewed the Congressional policy underlying the per diem rate structure applicable to the national railway system. Per diem charges for use of railroad cars were instituted to insure an adequate supply and efficient utilization of the nation's fleet of railroad cars. For example, in the grid of railroad lines spanning the country, cars of the Atlantic Railroad may be loaded in Maine, destined ultimately to be delivered by the Pacific Railroad in California, which in the interim traverses the lines of intermediate carriers. The per diem is a charge that the other carriers pay the car-owning Atlantic Railroad for the use of its car while it is on their lines.

The basic per diem that had been in existence for many years prior to 1966 was so low that it did not result in generating an adequate supply of the available fleet of cars, i. e., it did not sufficiently encourage the user carrier to remove an unloaded freight car from its line and return it to the owner or another carrier for loading. In 1966, the Congress determined to remedy this situation by raising the per diem rental charges to create an incentive for the railroads to sustain car movement and also to generate funds for the purchase of additional freight cars. See 49 U.S.C. § 1, P 14(a); Incentive Per Diem Charges-1968, 337 I.C.C. 183 (1969), 349 I.C.C. 303 (1975), 353 I.C.C. 366 (1977). In furtherance of this Congressional intent, the Interstate Commerce Commission promulgated certain rules and regulations which provided that common carriers by railroad were required to segregate in separate bank accounts credit balances resulting from incentive income payments which could be "drawn down" only to rebuild freight cars or to purchase new ones. 49 C.F.R. § 1036.

In Rock Island we recognized the broad powers accorded to the reorganization court in matters affecting the claims of creditors. Section 77(a) of the Bankruptcy Act confers on the court exclusive jurisdiction over the debtor railroad and its property and grants the court all powers over that property traditionally exercised by an equity receiver. 537 F.2d at 909. We also noted that Section 77(c)(2) provides that during the reorganization period the trustee has the "power to operate the business of the debtor railroad 'subject to the control of the judge and the jurisdiction of the Commission.' 11 U.S.C. § 205(c)(2)." Id. at 910 (emphasis in original). We therefore held that a reorganization court is without power to exempt a railroad in reorganization from compliance with the order of the Commission requiring priority of payment of charges accrued to pre-reorganization per diem accounts.

We also noted other factors that persuaded us that the reorganization court's power in determining the priority of per diem charges in relation to claims of other creditors had been circumscribed by the superseding authority of the Commission in this area. Thus, we adopted the Commission's characterization of the relationship rather than that of debtor and creditor because the Commission had treated per diem accounts as a statutorily required sharing of the costs of maintaining an adequate national car pool and because the basic per diem rates provided no profit to the car-owning railroad and were assessed even when the user derived no benefit from its use of the car. We also deferred to the Commission's argument concerning the mandatory nature of its orders governing the settlement of per diem accounts which prescribe the time and manner of payment in contrast to other interline accounts in which the trustee in its discretion had deferred payment. Accordingly, we concluded that the Congressional goal of equitable cost-sharing of a common pool of rail cars would be achieved only through the uniform observance of per diem charges.

In the case at bar, the district court decided that the rationale underlying the priority payment of per diem...

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