Matter of Delaware & Hudson Ry. Co., Bankruptcy No. 88-342

• Decision Date: 07 May 1991
• Docket Number: Bankruptcy No. 88-342,Adv. No. 90-42.
• Citation: 127 BR 756
• Parties: In the Matter of DELAWARE & HUDSON RAILWAY COMPANY, a Delaware corporation, Debtor. Francis P. DICELLO, as Trustee, for the Delaware and Hudson Railway Company, Plaintiff, v. BOSTON AND MAINE CORPORATION, and Maine Central Railroad Company, Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

127 B.R. 756 (1991)

In the Matter of DELAWARE & HUDSON RAILWAY COMPANY, a Delaware corporation, Debtor Francis P. DICELLO, as Trustee, for the Delaware and Hudson Railway Company, Plaintiff, v. BOSTON AND MAINE CORPORATION, and Maine Central Railroad Company, Defendants.

Bankruptcy No. 88-342, Adv. No. 90-42.

United States Bankruptcy Court, D. Delaware.

May 7, 1991.

Eduard F. von Wettberg, III, Joanne B. Wills, Wilmington, Del., Arthur B. Vieregg, Jr., Rodney H. Glover, B. Lee Willis, Washington, D.C., for trustee.

Jeffrey S. Goddess, Mark Minuti, Wilmington, Del., John H. Broadley, David A. Handzo, Julie M. Carpenter, Washington, D.C., for defendants.

HELEN S. BALICK, Bankruptcy Judge.

The Trustee of the Delaware & Hudson Railway Company (D & H) sued its related corporations the Boston and Maine Corporation (B & M) and the Maine Central Railroad Company (MeC) for the turnover of 5.5 million dollars collected by them for freight shipments carried by the D & H in the three months preceding its bankruptcy filing on June 20, 1988. The Trustee alleges that MeC and B & M in refusing to turnover these amounts are breaching a fiduciary duty and have violated the Code's automatic stay provisions. B & M and MeC admit that the amounts claimed are owed to the D & H, but they assert a right to set-off those amounts against debts they allege the D & H owes them. In lieu of trial, the parties submitted a joint stipulation of facts and conclusions of law.

Some preliminary fact findings are necessary to a resolution of the primary issue of whether the funds collected represent trust funds or whether the monies collected by B & M created a debtor-creditor relationship with the D & H.

Each of the three railroads are wholly-owned subsidiaries of Guilford Transportation Industries, Inc. Between January 4, 1984, when GTI acquired the D & H and June 17, 1988, the three roads had virtually identical boards of directors and substantially overlapping management. During this time, one or the other of the sister corporations acted as "collecting" carrier for "interline" shipments of freight that traveled over the D & H. Interline shipments are those that travel over more than one railroad and the "collecting" carrier here is either the originating railroad or the terminating railroad. The "collecting" carrier is responsible for paying the other railroads which participated in the movement their pro-rata share of shipping charges even if it fails to collect from a given customer. On the other hand, a connecting railroad must look solely to the collecting carrier for payment. It has no recourse against customers. The D & H was primarily a connecting carrier and derived most of its operating revenue from interline freight shipments.

Accounts among railroads for "interline" freight shipments are settled on a monthly basis. On or about the 12th working day of the month, the terminating carrier prepares an abstract which reflects the amount the "collecting" carrier owed to "connecting" carriers. After exchanging abstracts, the railroads compute what they owe each other for "interline" freight shipments. Only the net amount is paid and payment typically occurs on and after the 14th working day of the month. Payment is made in one of three ways — the draft system, bill and voucher system, and wire transfer.

On June 20, 1988, the B & M owed D & H interline freight amounts representing a portion of the service month of April and service months of May and June for a total of $4,581,812.70. For the service months of May and June, MeC owed for interline freight amounts $885,401.75. Sometime between June 20 and September 28, 1988, D & H submitted drafts in amounts less than that owed by each of its sister railroads for pre-petition interline payments which were declined. An officer of the B & M and MeC had told the Trustee's auditors that the pre-petition amounts would not be paid but would be handled as an offset against the greater amounts the B & M and MeC allege the D & H owes them. Those amounts as stated in proofs of claim filed on behalf of each on September 1, 1989 are B & M's claim of $43,336,500.42, which includes $4,800,000 transferred by wire from B & M to D & H on February 4, 1988; and MeC's claim of $13,162,301.44, which includes six wire transfers during January 1988 totalling $2,200,000.

This brings us to discussion of whether the interline freight amounts paid by collecting carriers to B & M and MeC created a trustee relationship or debtor-creditor relationship.

Turnover of Interline Funds

The law on turnover of interline railroad funds involving a railroad in reorganization is well-settled within this Circuit and is controlled by the Third Circuit's decision in In re Penn Central Transportation Co., 486 F.2d 519 (3d Cir.1973) (en banc) cert. denied, 415 U.S. 990, 94 S.Ct. 1588, 39 L.Ed.2d 886 (1974). In Penn Central, the Court of Appeals sitting en banc held that interline "transportation and freight charges, when collected, are held in trust by the Interlines." 486 F.2d at 524 (emphasis in original). In determining whether the interline monies were trust funds or not, the court looked to the "manifestations of intent" reflected in "the facts and circumstances surrounding the transaction" as well as the "relationship of the parties." Id. at 524. The interline account in Penn Central was not subject to interest and, therefore, an indicia of a trust relationship. Moreover, though commingled funds normally suggest a debtor-creditor relationship, the Penn Central court underscored this factor stating that "commingling of monies has minimal significance in the extraordinary operations of interline railroads." Id. at 525. Finally, the court found that the relationship of the parties indicated a trust relationship in that the collecting railroad did apportion total charges with the interlines, the monies received by the interlines directly related to and was dependent upon the charges paid by shippers, and the amounts owed to the interlines were payable immediately upon striking the monthly settlement. Id. at 527. In sum, the landmark Penn Central case views interline funds held by one railroad for the benefit of another as trust funds rather than a trade debt provided that there are sufficient indicia to support the implied-in-fact trust relationship. Id. See also Missouri Pacific R.R. Co. v. Escanaba & Lake Superior R.R. Co., 702 F.Supp. 630, 633 (W.D.Mich.1988). The Third Circuit's holding in Penn Central is a matter of federal common law and not dependent on state law concepts. In re Lehigh & New England Ry. Co., 657 F.2d 570 (3d Cir.1981).

Although the Penn Central decision relied on principles of trust law, the underlying public policy of the case sought to support "the congressional policy encouraging interline rail transportation of freight and passengers nationwide." 486 F.2d at 527. Similarly, the concurring opinion of Judge Adams emphasized the national interest in maintaining a viable interline system; in fact, he would have gone so far to hold that, regardless of any semblance of a trust, interline carriers were entitled to superior status over that of creditors of the collecting carrier. Id. at 533. Nevertheless, the majority in Penn Central did not enunciate such a prophylactic rule with respect to interline creditors, but required that indicia of trusts (with emphasis on interest not being paid and deemphasis on commingling of funds) be present in the interline arrangement. See Restatement (Second) of Trusts § 2 (1959). Thus, Penn Central concluded that a trustee-beneficiary relationship is implied where railroads collected fees for each other and balanced their accounts monthly without paying interest. 486 F.2d at 524. Accord Chase v. Committee of Interline R.Rs. (In re Ann Arbor R.R. Co.), 623 F.2d 480, 483 (6th Cir.1980). Contra Union Pacific R.R. Co. v. Moritz (In re Iowa R.R. Co.), 840 F.2d 535 (7th Cir.1988) (expressly rejecting both the Penn Central trust rationale and Judge Adams' concurrence).

This case is nearly on all fours with Penn Central....