In re Tennessee Central Railway Company

• Decision Date: 10 October 1972
• Docket Number: No. 71-1228.,71-1228.
• Citation: 463 F.2d 73
• Parties: In the Matter of TENNESSEE CENTRAL RAILWAY COMPANY, Debtor. UNITED STATES of America, Plaintiff-Appellant, v. A. Battle RODES, Trustee of Tennessee Central Railway Company, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

463 F.2d 73 (1972)

In the Matter of TENNESSEE CENTRAL RAILWAY COMPANY, Debtor UNITED STATES of America, Plaintiff-Appellant, v. A. Battle RODES, Trustee of Tennessee Central Railway Company, Defendant-Appellee.

No. 71-1228.

United States Court of Appeals, Sixth Circuit.

February 2, 1972.

Rehearing Denied April 4, 1972.

Certiorari Denied October 10, 1972.

William E. Nelson, Dept. of Justice, Washington, D.C., for appellant; L. Patrick Gray, III, Asst. Atty. Gen., Morton Hollander, Atty., Dept. of Justice, Washington, D.C., Charles H. Anderson, U.S. Atty., Ames Davis, Asst. U.S. Atty., Nashville, Tenn., on brief.

David M. Keeble, Nashville, Tenn., for appellees; Roy Sherman, Philip M. Lanier, Louisville, Ky., on brief for the L. & N.R.R. Co.; William F. Bunn, Gen. Atty., Chicago, Ill., on brief for the Illinois Central Railroad; Duncan B. Phillips, Washington, D.C., on brief for Southern Railway System.

Daniel E. Seay, Lebanon, Tenn., Back Tax Atty., Wilson County.

O. Lawrence Dortch, Nashville, Tenn., for Humble Oil and Refining Co.; William L. Brooks, Nashville, Tenn., on brief; Waller, Lansden, Dortch & Davis, Nashville, Tenn., of counsel.

Wilson Sims, Nashville, Tenn., for Koppers Co.; Bass, Berry & Sims, Nashville, Tenn., of counsel.

Ogden Stokes, Asst. Metropolitan Atty., Dept. of Law, Nashville, Tenn., on brief for The Metropolitan Government of Nashville and Davidson County, Tenn.

Carmack Cochran, Nashville, Tenn., on brief for A. Battle Rodes, Trustee; Martin & Cochran, Nashville, Tenn., of counsel.

Lowell H. Jacobson, Jacobson, Brandvik & Padgitt, Chicago, Ill., on petition for rehearing in banc on behalf of Chicago Freight Car Leasing Co.

David S. Field, Asst. Metropolitan Atty., Nashville, Tenn., on petition for rehearing on behalf of The Metropolitan Government of Nashville and Davidson County, Tenn.

Before EDWARDS, PECK and BROOKS,^* Circuit Judges.

Rehearing En Banc Denied April 4, 1972.

Certiorari Denied October 10, 1972. See 93 S.Ct. 119, 126.

EDWARDS, Circuit Judge.

This is an appeal from a judgment entered in the United States District Court for the Middle District of Tennessee, 316 F.Supp. 1103. This issue is whether the federal government has priority in a section 77 railroad reorganization proceeding (11 U.S.C. § 205 (1970)) for debts due it over the equitable priority accorded to "six months claimants."

The government claim is based upon a federal statute, 31 U.S.C. § 191 (1970) (R.S. § 3466), adopted in 1797 giving it priority as to debts due it in any bankruptcy proceeding. The contesting claimants assert equitable priority because they furnished essentials to the bankrupt for the last six months of its operation before its insolvency.

In a well reasoned opinion the District Judge held that the Congressional purposes set forth in section 77 of the Railroad Reorganization Acts were better served by giving precedence to the equitable priority of the six months claimants. However, in United States v. Key, 397 U.S. 322, 90 S.Ct. 1049, 25 L.Ed.2d 340 (1969) (a case not argued to the District Court), the United States Supreme Court, acting unanimously, emphatically affirmed the federal priority accorded by § 3466 in a Chapter X case also concerning a corporate reorganization, but one not involving a railroad. Although the Supreme Court plainly did not have our exact issue before it, there is a close analogy between the Key case and this one. In addition, the Key opinion discussed section 77 and commented, "Nothing in § 77 casts any doubt on the continued priority of the United States under § 3466." United States v. Key, supra at 330, 90 S.Ct. at 1054, 25 L.Ed.2d 340.

The dictum just quoted, plus the strong analogy between the Key case and this case and the language of § 3466 itself all serve to convince us that we must reverse.

The Tennessee Central Railway Company was placed in reorganization under section 77 of the National Bankruptcy Act on December 14, 1967, after several years of operational losses. The Tennessee Central Railway Company has now ceased operations after selling all but a very small portion of its lines to three connecting railroads in 1968.

Appellees' claims in this case are for interline charges for services provided by connecting railroads, taxes due to local governments, and some diesel oil, wood and similar types of supplies for TCR provided by various private corporations—all related to the six month period before the reorganization proceedings. They totaled approximately $3 million.

The United States Government claims arise from two Reconstruction Finance Corporation loans (never repaid) upon which the United States was owed approximately $5.5 million as of the time of reorganization. The principal claim of the United States Government was secured by liens upon the entire TCR bond issue which came due April 1, 1967. If given full effect, the United States claims would serve to wipe out any balance left in the hands of the Trustee after sale of TCR's assets to three of the railroads which previously connected with it.

The District Court, before whom the Trustee had filed a petition to determine classes of creditors and the priorities to be assigned to each, held that § 3466 was inapplicable to a section 77 proceeding and that the interline carriers, suppliers and local taxing authorities were entitled to priority over the claims of the United States.

The rationale which led to the District Court's result and that urged upon us by appellees may be summarized thus:

(1) There is a great public interest involved in the continuing operation of railroads—more so than in continued operation of other private corporations.

(2) Congress recognized this interest in the enactment of section 77.

3) In addition, in a paragraph of section 77 (77(b)), Congress referred to and sought to preserve aspects of the equitable receivership which created the six months creditor priority rule.

We approach decision of this case with the fact in mind that bankruptcy proceedings are among the topics specifically committed to Congressional power by the Constitution of the United States. Article 1 § 8 of the Constitution says in part:

"The Congress shall have power . . .

* * * * * *

"To establish . . . uniform Laws on the subject of Bankruptcies throughout the United States; . . ."

As we have noted, the fundamental statute which we must construe in this case is R.S. § 3466 (31 U.S.C. § 191 (1970)) adopted in 1797. It provides:

"Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executor or administrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; and the priority established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed." R.S. § 3466.

There can be no doubt that TCR, for purposes of this statute, is "a person indebted to the United States who is insolvent." Equally plainly the $5.5 million which TCR owed the United States is a "debt" within the meaning of this statute.

By its plain language § 3466 applies to this case. And the language "the debts due to the United States shall be first satisfied" is unambiguous and mandatory.

Appellees, however, rely, as did the District Court, upon section 77, passed in 1933, and more particularly on section 77(b):

"For all purposes of this section unsecured claims, which would have been entitled to priority if a receiver in equity of the property of the debtor had been appointed by a Federal court on the day of the approval of the petition, shall be entitled to such priority and the holders of such claims shall be treated as a separate class or classes of creditors." 11 U.S.C. § 205(b) (1970).

The difficulty with appellees' argument is that section 77(b) contains no language arguably referring to or superseding the effect of § 3466. The situation here is much like that dealt with in United States v. Emory, 314 U.S. 423, 62 S.Ct. 317, 86 L.Ed. 315 (1941), where the Supreme Court set down the rules for interpreting § 3466:

"The applicability of § 3466 to this case is clear. The section applies in terms to cases `1 in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or 2 in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, . . . or 3 in which an act of bankruptcy is committed.\' This case falls within the third category. It is agreed that the St. James Distillery was insolvent `on or before August 1936\' and that in response to a creditor\'s petition a receiver was appointed to liquidate the corporate assets. The appointment of a receiver under such circumstances is among the most common examples of an `act of bankruptcy.\' Cf. § 3(a)(4) of the Bankruptcy Act, U.S.C., Title 11, § 21(a)(4).

"Just such proceedings as this, therefore, are governed by the plain command of § 3466 that `debts due to the United States shall be first satisfied.\' The purpose of this section is `to secure adequate public revenues to sustain the public burden\' (United States v. State Bank of North Carolina, 6 Pet. 29, 35 8 L.Ed. 308), and it is to be construed liberally in order to effectuate that purpose (Bramwell v. United States Fidelity & Guaranty Co., 269 U.S. 483, 487 46 S.Ct. 176, 70 L.Ed. 368). In view of this language, purpose, and rule of construction, the priority asserted here by the United States appears to be securely established." United States v. Emory, supra at 426, 62 S.Ct. at 319.

See also Small Business Administration v. McClellan, 364 U.S. 446, 81 S.Ct. 191, 5 L.Ed.2d 200 (1960). Both of these cases hold...