IN RE TENNESSEE CENTRAL RAILWAY COMPANY
| Decision Date | 27 August 1970 |
| Docket Number | No. BK 67-2263.,BK 67-2263. |
| Citation | 316 F. Supp. 1103 |
| Parties | In the Matter of TENNESSEE CENTRAL RAILWAY COMPANY, Debtor. |
| Court | U.S. District Court — Middle District of Tennessee |
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William D. Ruckelshaus, Asst. Atty. Gen., and Paul A. Sweeney, Special Asst. Atty. Gen., Washington, D. C., Charles H. Anderson, U. S. Atty., and Ames Davis, Asst. U. S. Atty., Nashville, Tenn., for the United States.
Wilson Sims, of Bass, Berry & Sims, Nashville, Tenn., for Koppers Co.
Lowell H. Jacobson, Westbrook, Jacobson & Branovik, Chicago, Ill., for Chicago Freight Car Leasing Co.
Lawrence Dortch, of Waller, Lansden, Dortch & Davis, Nashville, Tenn., for Humble Oil & Refining Co.
David M. Keeble, of Hooker, Keeble, Dodson & Harris, Nashville, Tenn., for Connecting Carriers.
David M. Keeble, of Hooker, Keeble, Dodson & Harris, Nashville, Tenn., and W. F. Bunn, Gen. Counsel, Chicago, Ill., on the brief, for Illinois Central Railroad Co.
David M. Keeble, Nashville, Tenn., Roy Sherman and Phillip M. Lanier, Louisville, Ky., on the brief, for Louisville & Nashville Railroad Co.
Carmack Cochran, Nashville, Tenn., for A. Battle Rodes, Trustee.
Ogden Stokes, Nashville, Tenn., for Metropolitan Government of Nashville and Davidson County.
Daniel Seay, Lebanon, Tenn., for Wilson County Taxing Authorities.
On September 22, 1969, the Trustee of the Tennessee Central Railway Company, Debtor, petitioned this Court for a hearing on the division of stockholders and creditors into classes according to the nature of their claims, and a determination of the order of priority of such claims. A hearing on these issues was held on November 10, 1969.
The history of this action, which is concerned with the reorganization and then the liquidation of the assets of the Tennessee Central Railway Company, will be found in this Court's opinion in In re Tennessee Central Railway Company, 304 F.Supp. 789 (M.D.Tenn., 1969).
There are four categories of creditors claiming all or a portion of the distributable assets of the Tennessee Central:
The present assets of the Tennessee Central, both in cash and in property not yet sold, total approximately $3,000,000. The claim of the government totals over $5,500,000. The claims of the carriers, and others claiming priority under the six-months creditors rule, total approximately $1,200,000. The various tax claims total over $80,000, and there are other suppliers' claims of more than $100,000.
Obviously, if the United States is given first priority in the recovery, its claim will consume all assets, and there will be no need to determine additional priorities.
Case law on the issues here presented is far from settled. While there are a few Supreme Court cases which touch upon relevant points, most of the published opinions are at the district court level. On some issues, conflicts exist among the circuits.
These reorganization proceedings are governed by the provisions of Section 77 of the National Bankruptcy Act, 11 U.S. C. § 205. If may be helpful at this point to quote from a general analysis of Section 77 contained in 5 Collier on Bankruptcy (14th ed.) ¶ 77.02:
Stated briefly, § 77 has for its main purpose "the rehabilitation of the debtor by a readjustment of its financial structure in the interest of the debtor and its creditors and security holders, under a fair and equitable plan of reorganization which shall so modify or alter the rights of both secured and unsecured creditors that the fixed charges shall be brought within the probable future earnings available for the payment thereof." During the process of reorganization, the section contemplates the continued corporate existence of the debtor under the control and supervision of the court. Although § 77 does not depart from the general theory of the Bankruptcy Act that one of the main purposes is to permit the creditors to share in the debtor's assets, yet it should be borne in mind that the section reflects a public policy that the operation of railroads as sound, economic units should be achieved for the benefit of the public, regardless of the interests of creditors and stockholders. It has been vividly stated that under § 77 "the reorganized road shall be a living, not a dying, railroad enterprise." Footnotes omitted.
Although no formal plan of reorganization has been filed during the proceedings, substantial compliance with the purposes of the act has been obtained. Virtually all of the Tennessee Central's line is now being operated by three other railroads, to whom portions of the bankrupt road were sold. Service has been maintained virtually to all areas previously served by the Tennessee Central. Since some of the claimants here have participated in the maintenance of service, the Court must take into consideration all factors which have contributed to this continuation of service.
The United States asserts a priority for its mortgage bonds under 31 U.S.C. § 191, a provision giving the United States a first priority in the assets "whenever any person indebted to the United States is insolvent. * *" This is a general provision which has been in effect, substantially unchanged, since 1797. It has been held that this provision is inapplicable in conventional bankruptcy proceedings. Adams v. O'Malley, 182 F.2d 925 (8th Cir. 1950); see In re Taylorcraft Aviation Corp., 168 F.2d 808 (6th Cir. 1948) (dictum); United States v. First National Bank & Trust Co., 386 F.2d 646 (8th Cir. 1967) (dictum). The United States contends, however, that its priority under 31 U.S.C. § 191 is to be afforded first position among the claimants by virtue of Section 77(b) of the National Bankruptcy Act, 11 U.S.C. § 205(b). Specifically, the last paragraph of section 205(b) provides in part:
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.
As noted above, the general priority of the United States in the assets of its insolvent debtors does not apply in bankruptcy cases, and the same priority may not be integrated into the Bankruptcy Act to create priorities for the Government that are not placed there by Congress. See Davis v. Pringle, 268 U.S. 315, 45 S.Ct. 549, 69 L.Ed. 974 (1925) (). Furthermore, section 205(b), supra, does not apply to secured claims. The government states in its Memorandum that:
The debts due the United States by the Debtor insofar as they are based upon the notes now in excess of $5,500,000 were secured by a pledge of all the Debtor's first mortgage bonds. The mortgage bonds in turn were secured by a mortgage upon all of the Debtor's property both real and personal. Memorandum at 9, 10
It would appear that the claim of the United States is a secured claim and thus expressly excluded from section 205(b), which grants priority to certain unsecured claims only. The United States contends, nevertheless, that the restriction of 11 U.S.C. § 205(b) to "unsecured claims" does not bar its secured claim from the same priority. With this conclusion the Court is unable to agree.
It is further contended on this point that proceedings under the railroad reorganization sections of the National Bankruptcy Act are a substitute for reorganization under an equity receivership. See 5 Collier, Bankruptcy ¶ 77.02 (14th ed.) Thus, it is argued that the instant proceeding is akin to reorganization under an equity receivership and that the proper conditions thus arise for recognizing a claim under 11 U.S.C. § 205(b) as the Government has argued. Whether the United States under this theory would be entitled to a priority for an unsecured claim in this proceeding by virtue of section 205(b) need not be decided. For, as pointed out, section 205(b) is inapplicable to secured claims like that of the United States.
The assertion of a first priority in the United States under 31 U.S.C. § 191 is further attacked by the carriers presenting claims upon the authority of 15 U. S.C. § 603, which declares that debts due to the Reconstruction Finance Corporation (RFC) should not be afforded any statutory priority otherwise available to the United States. The carriers urge that this provision prohibits the United States from asserting the debts owed by the Debtor to the RFC as a basis for priority under 31 U.S.C. § 191. The statute relied on by the carriers was repealed by Congress in 1966. Pub.L. 89-554, § 8(a), Sept. 6, 1966, 80 Stat. 648, 654-55. The purpose behind the original statute is plain. Loans such as the one made to the Debtor by the RFC were intended to keep firms in desperate financial condition in business. These were to be considered regular commercial loans, and were to be treated accordingly in insolvency proceedings. It seems clear that if the Tennessee Central proceedings had occurred prior to the repeal of 15 U.S.C. § 603 in 1966 there could be no question that the United States would have no...
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