In re Lehigh and Hudson River Railway Company

• Decision Date: 11 October 1972
• Docket Number: No. 205,Docket 72-1761.,205
• Citation: 468 F.2d 430
• Parties: In the Matter of the LEHIGH AND HUDSON RIVER RAILWAY COMPANY, Debtor. George P. BAKER et al., Appellants, v. John G. TROIANO, Trustee of the Property of the Lehigh and Hudson River Railway Company, Debtor, Appellee.
• Court: U.S. Court of Appeals — Second Circuit

468 F.2d 430 (1972)

In the Matter of the LEHIGH AND HUDSON RIVER RAILWAY COMPANY, Debtor.

George P. BAKER et al., Appellants, v. John G. TROIANO, Trustee of the Property of the Lehigh and Hudson River Railway Company, Debtor, Appellee.

No. 205, Docket 72-1761.

United States Court of Appeals, Second Circuit.

Argued September 14, 1972.

Decided October 11, 1972.

Paul R. Duke, Philadelphia, Pa. (Robert M. Peet, New York City, of counsel), for appellants.

Thomas V. McMahon, New York City (Conboy, Hewitt, O'Brien & Boardman, and Jerome H. Shapiro, New York City, of counsel), for appellee.

Before FRIENDLY, Chief Judge, and LUMBARD and FEINBERG, Circuit Judges.

FRIENDLY, Chief Judge:

This appeal raises a question concerning the scope of the summary jurisdiction of a district court presiding over a railroad's reorganization with respect to claims by that railroad against another —which, in this instance, is also in reorganization.¹

Prior to June 21, 1970, when the petition of Penn Central Transportation Company (Penn Central) for reorganization under § 77 was approved by the District Court for the Eastern District of Pennsylvania, Lehigh owed it at least $246,520.93 on "miscellaneous bills," a term referring to bills for services or facilities of various kinds but not standard interline accounts, on which Lehigh had been withholding payment. Whether this was because of lack of funds or for some other reason does not appear. On April 3, 1972, the Penn Central Trustees demanded immediate payment. After a discussion of Lehigh's precarious financial condition at an April 10 meeting of Lehigh's board of directors, on which Penn Central, as a Lehigh stockholder, was represented by a vice president, Lehigh's president wrote one of the Penn Central Trustees. He requested a guarantee that the Trustees would honor the regular monthly interline freight draft, which was normally due to be paid about April 25 and was estimated at $90,000. The Trustee responded on April 17 that Penn Central was making payment by applying the $90,000 owing to the Lehigh and Hudson River on the interline freight account for the service month of March, 1972, in reduction of the outstanding obligations which Lehigh was unable to settle in cash, and would apply any similar amounts in the future until that obligation was satisfied. Earlier, on April 14, Penn Central's comptroller had made a long-hand note on a paper headed "Journal Entry" debiting accounts payable to Lehigh and crediting accounts receivable from Lehigh with $90,000; he also wrote on the paper "To offset against amounts due from L & HR amounts owing for March Freight Settlement." On April 17, on the comptroller's instructions, the journal entry was made and then reversed in favor of a more elaborate one. The latter entry listed as debits the $90,000 estimated bill for interline freight balances, other items of indebtedness owed by Penn Central to Lehigh for car repairs, per diem charges, and the like, and two payments of $20,000 each which Lehigh had made to Penn Central on account, totaling $139,242.19; on the other side, it listed specific items owing by Lehigh to Penn Central in the same amount. The totals were offset, one against the other.

On April 11 Lehigh had drawn a draft on Penn Central, payable through the Philadelphia National Bank, for $1,247.02 for freight overcharge claims. Apparently this did not reach the bank until April 18. It was first stamped "paid" but the endorsement was later cancelled and a few days later, just when is not altogether certain, Penn Central returned the draft to Lehigh with a memorandum reading "Declined. To be offset against amount owed to Penn Central." On April 20 Lehigh drew another draft, similarly payable, for $67,585.71 for the March interline freight balances. This draft apparently was not received until April 26. Like the earlier draft, it was first stamped "paid" but in fact was not and was returned with a Penn Central memorandum stating, "Declined. To offset amounts due Penn Central."

The District Court for the Southern District of New York, on April 19, 1972, approved a petition of The Lehigh and Hudson River Railway Company under § 77 of the Bankruptcy Act and entered Order No. 1, paragraphs 10 and 11 of which provided as follows:

10. All persons and all firms and corporations, whatsoever and wheresoever situated, located or domiciled, hereby are restrained and enjoined from interfering with, seizing, converting, appropriating, attaching, garnisheeing, levying upon, or enforcing liens upon, or in any manner whatsoever disturbing any portion of the assets, * * * credits, choses in action, * * * belonging to, * * * the Debtor * * *.

11. All persons, firms and corporations, holding * * * for the account of the Debtor deposit balances or credits be and each of them hereby are restrained and enjoined from selling, converting or otherwise disposing of such collateral, deposit balances or other credits, or any part thereof, unless authorized by this Order, or from off-setting the same, or any thereof, against any obligation of the Debtor, until further order of this Court.

On Lehigh's petition Judge McLean issued an order on May 3, 1972, requiring the Penn Central Trustees to show cause why they should not be enjoined and restrained from failing to honor drafts submitted for interline freight balances or miscellaneous bills pursuant to the Accounting Rules of the Association of American Railroads and should not be required forthwith to honor the drafts of April 11 and 20. The order provided that, if the Trustees wished to assert that any setoffs were executed prior to bankruptcy, they should produce appropriate documentation at the hearing. The Trustees' answer, in addition to various admissions and denials, set forth as further defenses that "the facts relating to these accounts present a substantial adverse claim as to the Petitioner's entitlement to the amounts sought, and the Court is therefore without jurisdiction to enter the order sought in a summary proceeding" and that permission of the District Court for the Eastern District of Pennsylvania to bring "this action" against the Trustees had not been obtained. After a hearing the Judge entered an order enjoining and restraining the Penn Central Trustees from failing to honor drafts submitted for interline freight balances and overcharge claims and requiring them to pay the amount of the two drafts. The Trustees appealed and sought a stay, which another panel of this court declined to grant.

At the outset, it is well to correct a misconception resulting from Lehigh's reliance on the statement in 2 Collier, Bankruptcy ¶ 23.05 4, at 485 (1971), cited by the district court:

Where the character of the property is such that it is not capable of tangible or actual physical custody, constructive possession will suffice to confer summary jurisdiction upon the bankruptcy court regarding such property.

The discussion makes clear that this statement refers to conflicting claims of the bankrupt and others to the ownership of such intangibles; in such cases the rule with respect to choses in action is the same as that with respect to tangible property. But, as is explained in the final sentence of the subsection, id. at 489-90, and the cases...