IN RE BANGOR & ARROSTOOK RR CO.

• Decision Date: 15 February 2005
• Docket Number: Bankruptcy No. 01-11565. Adversary No. 03-1205,03-1211.,03-1206
• Citation: 320 B.R. 226
• Parties: In re BANGOR & AROOSTOOK RAILROAD, Debtor. James E. Howard, Chapter 11 Trustee of Bangor & Aroostook Railroad Company, Plaintiff, v. Burlington Northern & Santa Fe Railway Company, Defendant, James E. Howard, Chapter 11 Trustee of Bangor & Aroostook Railroad Company, Plaintiff, v. CSX Transportation, Inc., Defendant, James E. Howard, Chapter 11 Trustee of Bangor & Aroostook Railroad Company, Plaintiff, v. Canadian Pacific Railway Limited, Defendant.
• Court: U.S. Bankruptcy Court — District of Maine

320 B.R. 226

In re BANGOR & AROOSTOOK RAILROAD, Debtor.

James E. Howard, Chapter 11 Trustee of Bangor & Aroostook Railroad Company, Plaintiff, v. Burlington Northern & Santa Fe Railway Company, Defendant, James E. Howard, Chapter 11 Trustee of Bangor & Aroostook Railroad Company, Plaintiff, v. CSX Transportation, Inc., Defendant, James E. Howard, Chapter 11 Trustee of Bangor & Aroostook Railroad Company, Plaintiff, v. Canadian Pacific Railway Limited, Defendant.

Bankruptcy No. 01-11565. Adversary Nos. 03-1205, 03-1206, 03-1211.

United States Bankruptcy Court, D. Maine.

February 15, 2005.

Gayle H. Allen, David C. Johnson, Roger A. Clement, Verrill & Dana, Portland, ME, for Plaintiff.

Leonard M. Gulino, Bernstein, Shur, Sawyer & Nelson, Portland, ME, for Defendants.

MEMORANDUM OF DECISION

JAMES B. HAINES, JR., Bankruptcy Judge.

In these consolidated adversary proceedings, the trustee of Bangor and Aroostook Railroad Company ("BAR")¹ asserts that the defendants, other railroads who were entitled to payment from interline freight charges at all pertinent times, "improved their position" vis a vis BAR during the ninety days before bankruptcy (i.e., they were owed less on the petition date than they were on the ninetieth day preceding the petition). He asserts that defendants were paid their freight charges via monthly "setoffs" and that, under § 553(b),² those setoffs are avoidable to the extent they reduced what BAR owed each over the ninety day period. The defendants have moved for summary judgment, arguing that § 553(b) does not apply. They contend that no avoidable setoffs occurred because the funds that flowed to them were their own funds all along—that BAR merely collected their freight charges and held them as their trustee. Alternatively, they assert that the monthly "netting out" process was recoupment, immune from the Code's applicable avoidance provision.

Because I do not agree with the defendants that a federal common law rule imbues interline freight receipts with trust fund status, and because recoupment is inapplicable to the circumstances here, their motion for summary judgment will be denied.

Procedural Background

BAR was haled into bankruptcy involuntarily by a petition filed August 15, 2001. An order for relief entered against it on December 4, 2001. James Howard, BAR's trustee, initiated these three adversary proceedings, asserting the estate's right to recover from each defendant the amount that BAR's obligation to it declined during the ninety-day pre-petition period. Each of Howard's complaints invoked § 553(b) and characterized the railroads' inter-line settlement processes as effecting set-offs. The adversary proceedings have been consolidated, and the defendants have moved for summary judgment on the ground that § 553(b) is inapplicable. Howard has cross-moved for partial summary judgment, seeking a determination that § 553(b) applies.³

Factual Background⁴

Shipping freight any distance by rail generally requires the services of several railroad lines. Shipments come and go throughout the country, originating and traveling on multiple railroads. Shippers routinely pay one carrier (the "collecting carrier") a charge for the entire journey. That amount includes the charges of each railroad along the way. Thus, with regard to inter-line shipments, each railroad may be at once the collecting carrier for some, receiving funds and accruing obligations to participating carriers; and for others a participating carrier, accruing rights to freight charges for shipments which travel over its rails. In order to sort out who owes what to whom, many railroads, including those before me, have entered into a comprehensive arrangement to "net out" their entitlements and obligations on a monthly basis.⁵

Under pertinent agreements, BAR and the defendants are beneficiaries of the Railroad Clearinghouse, Inc. (the "Clearinghouse" or "RCH"), a trust established by the Association of American Railroads ("AAR") to facilitate settlement and payment of interline freight charges among its members.⁶ Railroads doing business under the Clearinghouse structure agree to deal with one another through rules promulgated by AAR. Those rules include the Railway Accounting Rules and the ISS (Interline Settlement System) Railroad Clearinghouse Settlement Regulations, collectively referred to as the Interline Settlement Rules.⁷ General Mandatory Rule 149 outlines the ISS's operation in detail:

149 Funds Transfer of Interline Balances

A. On an interline shipment, the carrier responsible for collecting freight and/or switching charges, including absorbed switching charges, due from the consignor, consignee, or other party ("the collecting carrier") acts for and on behalf of the participating interline carriers in the collection and forwarding of all funds due in connection with such charges and further acts as guarantor to the other participating interline carriers with respect to the collection of all individual charges which comprise such funds. Regardless of whether the collecting carrier has effected the collection of the related individual charges due from the consignor, consignee or other party, the collecting carrier must remit to the participating carriers their proportion of all funds due under the applicable divisional agreements, price authorities, or other authorities.

B. The ISS will furnish details of all Interline Freight Settlements including the amounts due and payable by the collecting carrier to each interne carrier and the Railroad Clearing House on the first calendar day of the month following settlement. Any discrepancy in this statement must be called to the attention of the ISS. The Railroad Clearing House will administer the exchange of funds on the second working day.

C. In discharging its obligations to other participating interline carriers, the collecting carrier acts as a trustee, and holds monies collected in trust for the other carriers in the route, under applicable law concerning interline freight accounts. Carrier obligations under this Freight Mandatory Rule 149 shall be governed by the law concerning the settlement of interline freight revenues as enunciated in the United States Court of Appeals for the Third Circuit in In re Penn Central Railroad, 486 F.2d 519 (3rd Cir.1973).

D. The paying carrier must pay each switching carrier, including any intermediate switching carriers, its proportion of the switching revenue. Settlement will be made on net balances which will be immediately subject to sight draft payment by check/voucher or other agreed means of exchanging funds.

Stipulation Al at p. 22 (emphasis added).

Although participating railroads are expected, indeed required, to dispatch funds to the Clearinghouse as dictated by its monthly Net/Net Position Report, the Interline Settlement Rules authorize carriers to exercise setoff rights against one another directly when they are unable to resolve disputes by less confrontational means.⁸

Discussion

1. Setoff and § 553

The trustee contends that by way of the interline settlement system, each of the defendants, through setoff, reduced the amounts owed to it by BAR during the ninety days before the petition was filed. He invokes § 553(b) in an attempt to recapture for the estate the amounts by which each defendant improved its position during the critical period. Section 553(b) provides as follows:

(b)(1) Except with respect to a setoff of a kind described in section 362(b)(6), 362(b)(7), 362(b)(14), 365(h), 546(h), or 365(i)(2) of this title, if a creditor offsets a mutual debt owing to the debtor against a claim against the debtor on or within 90 days before the date of the filing of the petition, then the trustee may recover from such creditor the amount so offset to the extent that any insufficiency on the date of such setoff is less than the insufficiency on the later of—

(A) 90 days before the date of the filing of the petition; and

(B) the first date during the 90 days immediately preceding the date of the filing of the petition on which there is an insufficiency.

(2) In this subsection, "insufficiency" means amount, if any, by which a claim against the debtor exceeds a mutual debt owing to the debtor by the holder of such claim.

11 U.S.C. § 553(b) (emphasis added).

A right of setoff is grounded on the existence of "mutual debts." A owes B "x" dollars; B owes A "y" dollars; setting off, A may pay B "x-y." Setoff is rooted in nonbankruptcy law. "Only when a creditor enjoys an independent right of setoff will the consequent exercise of a setoff right against a debtor come within the further, Code-imposed requirements and limitations of § 553." 3 William L. Norton, Jr., Norton Bankruptcy Law and Practice 2d, § 63:3 at 63-17-18 (1997) (footnotes omitted) (hereafter "Norton").

Section 553's mutuality requirement comprehends debts existing between the same parties, owing and held, in the same right and capacity. See generally Norton § 63:5; 5 Lawrence P. King, Collier on Bankruptcy ¶ 553.033 (15th ed. rev.2004) (hereafter "Collier"). The Code, however, does not define "mutual."

The question is whether BAR and each of the defendants incurred "mutual debts" with regard to collected interline freight charges. The defendants' contentions regarding trust and recoupment characterize their relations with BAR as something other than the "mutual debt" circumstance to which § 553(b) applies.

Without Rule 149's gloss, the relations between BAR and each of the defendants is a classic case of mutual debts. Each interline freight shipment triggers charges attributable to the services provided by each of several railroads. The collecting railroad takes in the entire fare—and owes prescribed portions of it to each participating carrier. That there are multiple shipments and multiple parties is of no moment. The circumstances reduce to sets of bilateral relationships in which one railroad owes freight charges to another, and the...