In re Chicago Rapid Transit Co.

• Citation: 129 F.2d 1
• Decision Date: 22 July 1942
• Docket Number: No. 7858.,7858.
• Parties: In re CHICAGO RAPID TRANSIT CO. CHICAGO JUNCTION R. CO. v. SPRAGUE et al.
• Court: U.S. Court of Appeals — Seventh Circuit

129 F.2d 1 (1942)

In re CHICAGO RAPID TRANSIT CO.

CHICAGO JUNCTION R. CO. v. SPRAGUE et al.

No. 7858.

Circuit Court of Appeals, Seventh Circuit.

June 30, 1942.

Rehearing Denied July 22, 1942.

COPYRIGHT MATERIAL OMITTED

John D. Black, Ralph M. Shaw, and Robert McDougal, all of Chicago, Ill. (Silas H. Strawn and George W. Ott, both of Chicago, Ill., on the brief), for appellant.

Thomas L. Marshall, David A. Watts, Joseph E. Nolan and Daniel C. Smith, all of Chicago, Ill., for appellees.

Before EVANS, KERNER, Circuit Judges, and LINDLEY, District Judge.

LINDLEY, District Judge.

In the course of reorganization proceedings of the debtor, a public transportation utility operating in Chicago, the District Court ordered the trustees to reject a lease of respondent lessor's branch line and directed that operation of the leased property by the trustees subsequent to the filing of the debtor's petition for reorganization be for the account of the lessor. From this order respondent appeals.

In 1903 respondent, the Chicago Junction Railroad Company, lessee of a railroad right-of-way owned by the Union Stock Yards and Transit Company of Chicago, built an elevated railroad structure running east and west at right angles across one of the main lines of the debtor, terminating on the west at the stock yards, all in pursuance of an ordinance of the City of Chicago which provided that the line when built should be permanently operated by the predecessor of the debtor under a lease or "other arrangement." Accordingly respondent, after building the line, leased it to debtor's predecessor, who agreed to pay as annual rental interest upon the bonds sold, to produce the cost of construction, some $93,080 per year. The lease was for 50 years with certain provisions for renewal and gave to lessor the right to revoke for default. The debtor, succeeding to its predecessor's rights, continued to use the structure as a part of its unified elevated transportation system in the city, until, in 1932, the District Court appointed receivers in equity for the debtor. At that time there was due respondent $30,509.55 delinquent rental. The receivers continued operation of the line in connection with the unified system, paying rental between June 28, 1932 and August 31, 1934, of $202,190.60. Since the latter date no rent has been paid.

On May 26, 1936 the lessor petitioned the court in the equity cause to direct the receivers to pay the rental then due. The petition, having been answered, was referred to a special master who, on December 31, 1936, reported recommending that respondent be allowed $30,509.55 for prereceivership rentals as a general claim and that the demand for rental between August 31, 1934 and March, 1936 be allowed as an expense of receivership in the amount of $139,620. The receivers took no steps to affirm or to reject the lease.

On January 22, 1937 the debtor filed and the court approved its petition under Section 77B of the Bankruptcy Act, 11 U. S.C.A. § 207, for reorganization, in which it stated that its good-will could be preserved and the interests of its creditors and of the public protected only by maintenance and operation of the property as a single transportation system. The court found the debtor to be a railroad corporation engaged in transportation of passengers for hire in intrastate commerce as a public utility under the laws of Illinois, subject to the regulatory jurisdiction of the Illinois Commerce Commission. It directed the trustees to continue to operate all property, assets and business taken over from the receivers.

Some four months later, the trustees filed a petition for an order requiring respondent to modify and revise the terms of the lease by reducing the rental to a reasonable amount to be determined by the court. Respondent answered, praying that the court deny the petition and order the trustees to pay the amount found due by the master in the receivership and all rentals accruing thereafter. On September 29, 1938 the trustees amended their petition praying, in the alternative, that they be authorized to abandon operation of the leased branch line, subject to approval by the Illinois Commission, and thereupon to disaffirm and abandon the lease. The petition was referred to a master and, while it was still pending, on the 12th day of July, 1940, the trustees filed a second amendment wherein they prayed in the alternative that they be authorized not to adopt but to reject the lease and that the court authorize them, if necessary to prevent discontinuance of public service until approved by the Illinois authorities, to continue the operation solely for the benefit and account of lessor.

The court approved the findings of the master and ordered that the trustees not adopt but reject the lease, holding that the lessor was not entitled, after the date of institution of reorganization proceedings, to recover from the debtor or the trustees any contractual rent but only such amount, if any, as might be found due on an accounting by the trustees on the basis of having operated the property for the account of respondent after January 22, 1937, and finding that an accounting to that date showed a deficit for each of the years, 1937 and 1938, in excess of $116,000. The court directed the trustees to continue service over the leased property, not for the account of the estate but only for the benefit and account of respondent, and only until the trustees should be duly authorized to cease operation by reason either of the lessor taking over operation or physical abandonment of such operation, duly authorized. It ordered that, upon cessation of operation, the trustee surrender possession to respondent, and gave the lessor leave to file with the court its claim for any damages it might deem it had suffered because of rejection of the lease. The court found that it had jurisdiction, without permission of the Illinois Commission, to determine whether the lease was burdensome and should be abandoned; that it was in fact burdensome and should be rejected, and that there had occurred no such undue delay as would estop the trustees from electing not to adopt. This appeal followed.

Respondent contends that the court was in error in approving disaffirmance, in disallowing rental as an administrative expense of the estate and in directing that operation from and after the date of filing the petition for reorganization should be deemed for the account of the lessor. These questions are presented: May the trustees of an insolvent utility company, in reorganization under Section 77B of the Bankruptcy Act, reject a burdensome previously existing lease of a branch line? Does the fact that the leased line has been operated in conjunction with other property as part of a unified metropolitan transportation system have any relevance? Does the fact that the debtor is a public utility operating an intrastate system, subject to regulation by the Illinois Commission, limit or modify the bankruptcy court's power to reject? Did the order effectuate abandonment of a public service? Will it result in unauthorized confiscation of the lessor's property? Was the court justified in concluding that the trustees' operation should at all times be for the account of the lessor?

Sole jurisdiction in bankruptcy is by the Constitution lodged in the National Government. That power, when given expression in legislation by Congress, is paramount and transcends and supersedes all inconsistent state laws. State of Colorado v. United States, 271 U.S. 153, 162-166, 46 S.Ct. 452, 70 L.Ed. 878; Transit Commission v. United States, 284 U.S. 360, 52 S.Ct. 157, 76 L.Ed. 342; New York v. United States, 257 U.S. 591, 42 S.Ct. 239, 66 L.Ed. 385; American Brake Shoe & Foundry Co. v. Interborough Rapid Transit Co., D.C., 10 F.Supp. 512; affirmed, 2 Cir., 76 F.2d 1002, certiorari denied New York City v. Murray, 295 U.S. 760, 55 S.Ct. 923, 79 L.Ed. 1702.

Congress has not thus far attempted to reach the utmost horizon of the power. Under existing bankruptcy legislation, contractual relationships and obligations may be discharged; under certain circumstances, judgments valid under the state law set aside; preferences otherwise valid abrogated, and debts composed and settled for less than their face value. Even before the more recent extensions of bankruptcy jurisdiction by Sections 75, 77 and 77B, 11 U.S. C.A. §§ 203, 205, 207, a trustee was allowed to abandon assets deemed valueless and, in operation and maintenance of the assets, in liquidation and in equitable division of proceeds, to reject burdensome leases. All these are forceful illustrations of the far-reaching extent of this paramount federal power. The power to rid the trust estate of exorbitant unjustified expenditures and thereby to protect its beneficiaries, the creditors, is incidental to the power to fix the rights of creditors as of the date of attachment of jurisdiction in bankruptcy and to liquidate the assets and divide them ratably among beneficiaries. The Supreme Court has expressly held such authority lodged in the bankruptcy court by Section 77B. Philadelphia Co. v. Dipple, 312 U.S. 168, 61 S.Ct. 538, 85 L.Ed. 651.

It is not for us to decide whether Congress may, in providing for bankruptcy administration of intrastate utility corporations, suspend all state legislation. Our essential question in this respect is narrowed to this: whether, under the particular circumstances here, the order rejecting the lease infringed upon power still lodged in the state to regulate its own utilities.

In determining the extent of bankruptcy power, it matters little whether we consider the precedents under the original act or under Sections 75, 77 or 77B, for the intent and purport of all bankruptcy legislation, so far as the power to protect the estate is concerned, is largely declaratory of certain recognized equitable principles, namely: the power of a court of equity to protect...