Chicago, Rock Island and Pacific R. Co., Matter of

• Decision Date: 28 February 1985
• Docket Number: No. 84-1148,84-1148
• Citation: 756 F.2d 517
• Parties: Bankr. L. Rep. P 70,297 In the Matter of CHICAGO, ROCK ISLAND AND PACIFIC RAILROAD COMPANY, Debtor. Appeal of IOWA DEPARTMENT OF TRANSPORTATION.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 517

756 F.2d 517

Bankr. L. Rep. P 70,297

In the Matter of CHICAGO, ROCK ISLAND AND PACIFIC RAILROAD COMPANY, Debtor Appeal of IOWA DEPARTMENT OF TRANSPORTATION.

No. 84-1148.

United States Court of Appeals, Seventh Circuit.

Argued Nov. 5, 1984.

Decided Feb. 28, 1985.

Barbara S. Steiner, Jenner & Block, Chicago, Ill., for debtor-appellee.

Lester Paff, Asst. Atty. Gen., Iowa Dept. of Justice, Iowa Dept. of Trans., Ames, Iowa, for creditor-appellant.

Before ESCHBACH and POSNER, Circuit Judges and WISDOM, Senior Circuit Judge. ^*

POSNER, Circuit Judge.

This appeal by the State of Iowa in a railroad bankruptcy case requires us to consider the duty (if any) of a railroad which becomes bankrupt and ceases operations to place the highways that cross its abandoned rail lines in the condition they would have been in if there had never been a railroad.

In 1975 the Rock Island Railroad, serving areas in the Midwest, including Iowa, petitioned for reorganization under section 77 of the Bankruptcy Act of 1898, 11 U.S.C. Sec. 205 (1976 ed.). In 1980 the district judge presiding over the reorganization proceeding ordered the trustee to liquidate the Rock Island's railroad operations. The Rock Island is expected to emerge from the proceeding as a going concern--but a going concern in real estate rather than an operating railroad.

The trustee made a contract with a salvage company for the removal of the rails and ties and their sale as scrap, but the contract was explicit that the rails embedded in paved highway crossings would be left in place. Rails on a bridge or underpass would be removed within as well as on each side of the crossing but the bridge or underpass itself would be left in place. The district judge approved the contract in August 1981, after notice and a hearing at which the State of Iowa had objected to the dismantling of some of the rail lines covered by the contract but had not objected to the provision regarding crossings. The salvage operations began in the fall of 1981 (in Iowa as elsewhere) and are continuing, the delay in completing them being due to the fact that the trustee is still trying to sell some lines as operating rail lines. The record contains an estimate of the total revenues that the salvage operations will yield the Rock Island--$31 million--but not of the cost of the operations, so we do not know what their net value will be.

In February 1983 Iowa petitioned the district judge to order the Rock Island to take all steps necessary to put the highway crossings in Iowa in the condition they would be in if there had never been a railroad. This would mean removing railroad bridges, filling in railroad underpasses, and taking up the rails and repaving the highways at grade crossings. All highway crossings would be affected, whether or not the highway was there before the railroad, provided only that the highway was a state highway rather than a local road. The record does not indicate the number of crossings that would be affected or the cost of removing them, although the state opined at argument that the net cost to the Rock Island (that is, the cost of removal minus the salvage value of any tracks and ties that are sold from the crossings) would be less than $1 million. The state is willing to do the work and bill the trustee for the expense, and argues that this would be an administrative expense just like the cost of carrying out the salvage operations themselves and would therefore be entitled to priority of payment from the bankrupt's assets over the rest of the creditors. See 5 Collier on Bankruptcy p 77.21, at pp. 611-14 (14th ed. 1978). As a matter of fact, the state has already restored a few of the crossings, and therefore also seeks reimbursement by the trustee for its expenses in doing so.

The district judge refused to order removal of the crossings or reimbursement of the state's expense of removal and the state has appealed. The situation with regard to bankruptcy appeals has become extremely confusing as a result of developments culminating in last summer's bankruptcy amendments, see In re Riggsby, 745 F.2d 1153 (7th Cir.1984), but none of these developments is pertinent to this case. Proceedings under section 77 of the Bankruptcy Act of 1898 were not transferred to the new bankruptcy courts established by the 1978 Act, see Bankruptcy Reform Act of 1978, Pub.L. 95-598, Title IV, Sec. 409(a)(1)(A), 92 Stat. 2687, and thus the provisions relating to appeals from those courts are inapplicable to this case. Under section 24(a) of the old Act, 11 U.S.C. Sec. 47(a) (1976 ed.), an order of a bankruptcy court (such as the district court in the present case) that rejects a claim against the bankrupt estate is appealable as a final order in a separable controversy. See In re UNR Industries, Inc., 725 F.2d 1111, 1116 (7th Cir.1984); In re Saco Local Development Corp., 711 F.2d 441, 444-45 (1st Cir.1983).

The state's concern about the abandoned crossings is that if they are neither removed (with restoration of each crossing to the condition it would be in if there had never been a railroad) nor maintained, eventually they will deteriorate and become an obstruction or hazard to highway traffic; some of the crossings, the state adds, already have deteriorated to that point. The potential danger is most dramatically presented by the railroad bridges--which if not removed or maintained will eventually collapse onto the highways below--and underpasses: if they are not removed or maintained their roofs will eventually cave in and the highways above will collapse. The state does not see why it should have to bear an expense for removal or maintenance that it would not have borne had there never been any railroad tracks for state highways to cross.

"Administrative expenses consist of all the expenses incurred after the order for relief that are necessary to administer the estate and, if the debtor is reorganizing or is not immediately liquidating, to conduct the business of the debtor after the order for relief." 3 Collier on Bankruptcy, p 507.04[a], at p. 507-24 (15th ed. 1984). Thus a broker's commission for selling salvaged track would be an administrative expense because it would be an unavoidable expense of liquidating the bankrupt estate in a manner that maximized the value of the estate for the benefit of the creditors, and thus the cost of the salvage contract in this case is an administrative expense because it is indispensable to the creation of a benefit for the creditors. But Iowa is not like our hypothetical broker, seeking to render to the bankrupt and hence to its creditors a service that would not be rendered if the provider were not assured of payment by being given superpriority. It is seeking in effect an order enjoining a prospective nuisance, or, what amounts to the same thing, an order reimbursing it for the cost of abating the prospective nuisance. Its interest is thus that of a kind of tort creditor, or conceivably, as we shall see, contract creditor--an interest competitive with rather than beneficial to the interests of those creditors and therefore not entitled to the priority of an administrative expense. A number of cases so hold, some with facts quite like those in this case. See In re Madison Rys., 115 F.2d 586, 589 (7th Cir.1940); In re International Ry., 85 F.Supp. 331, 340 (W.D.N.Y.1949); Village of Stillwater v. Hudson Valley Ry., 255 N.Y. 144, 154-55, 174 N.E. 306, 310 (1931); Westinghouse Elec. Mfg. Co. v. Barre & Montpelier Traction & Power Co., 98 Vt. 130, 139-40, 126 Atl. 594, 598 (1924). Although section 1171(a) of the new Bankruptcy Act (one of the few provisions of the new Act that are applicable to proceedings under section 77 of the old, see Bankruptcy Reform Act of 1978, supra, Secs. 403(a), 403(b), 92 Stat. 2683) makes the satisfaction of a personal-injury or wrongful-death claim against a bankrupt railroad an administrative expense, that is not Iowa's claim.

Iowa might have a good argument for treating its claim as an administrative expense if the removal of the tracks were necessary to avert an imminent danger, a factor not alluded to in the cases we have cited. Then removal would be like buying a new electrical grade-crossing signal to replace one that had worn out--a transaction that would benefit creditors by protecting the bankrupt estate against tort liability for crossing accidents. Maybe some of the removals sought by the State of Iowa are in this category, but its request for superpriority is not so limited, and removals that will benefit the citizens of Iowa years after the reorganization is complete and the Rock Island ceases to be a railroad are unlikely to benefit the Rock Island's creditors. It is true that in a reorganization the creditors commonly end up owning equity securities in the reorganized firm; and it is also true, as we shall see, that the abandonment of the crossings might not exonerate the firm from liability for injuries resulting from their becoming hazardous to people using them. So the proposed removals may eventually benefit some or even all of the creditors. But the benefit, if any, is too slight, indirect, conjectural, and remote to justify classifying the expense of restoration as an administrative expense.

Although Iowa does not have a good claim for services rendered to the bankrupt estate, maybe it has a different kind of claim, the claim of a general creditor, most plausibly a tort creditor. The parties agree that the law applicable to deciding whether it has a claim is that of Iowa.

Since a tort presupposes injury, Cenco Inc. v. Seidman & Seidman, 686 F.2d 449, 453 (7th Cir.1982), we must consider what if any injury the railroad's failure to restore the crossings has done to Iowa. It might seem there could be none--that the state's claim is hopelessly premature, since the citizens of Iowa can sue for damages if and when they are injured by the deterioration of the crossings. But this...