Matter of Boston and Maine Corp.

• Decision Date: 12 March 1979
• Docket Number: No. 70-250-M.,70-250-M.
• Citation: 468 F. Supp. 996
• Parties: In the Matter of BOSTON AND MAINE CORPORATION, Debtor.
• Court: U.S. District Court — District of Massachusetts

468 F. Supp. 996

In the Matter of BOSTON AND MAINE CORPORATION, Debtor.

No. 70-250-M.

United States District Court, D. Massachusetts.

March 12, 1979.

COPYRIGHT MATERIAL OMITTED

Charles W. Mulcahy, Jr., Mulcahy & Mulcahy and Robert M. Gargill, Choate, Hall & Stewart, Boston, Mass., for trustees.

Joseph H. B. Edwards, Paul J. Lambert, Diane M. Kottmyer, Bingham, Dana & Gould, Boston, Mass., for first mortg. indenture trustees.

Paul B. Galvani, Ropes & Gray, Boston, Mass., for Maine Cent. R. Co. and the Portland Terminal Co.

John T. Collins, Sherburne, Powers & Needham, Boston, Mass., for the Chesapeake & Ohio Ry. Co., the Baltimore & Ohio R. Co., and Western Maryland Ry.

William P. Quinn, Fell, Spalding, Goff & Rubin, Philadelphia, Pa., for Trailer Train Co.

William R. Glendon, Donald F. Luke, Rogers & Wells, New York City, and W. Charles Hogg, Jr., Edward C. Toole, Jr., Stephen W. Miller, Clark, Ladner, Fortenbaugh & Young, Philadelphia, Pa., for the Committee of Interline Railroads.

William Humphrey Tucker, Boston, Mass., for trustees of the property of Penn Central Transp. Co., debtor.

Philip Burling, Foley, Hoag & Eliot and John J. Glessner, III, Boston, Mass., for Eastern Associated Coal Co.

George W. McLaughlin, Boston, Mass., for Canadian Pac. Railroad.

John T. Daley, Dane, Howe & Brown, Boston, Mass., for Exxon Corp.

Francis J. Robertson, pro se.

Sunshine & Sunshine, P. C., New York City, for Uniroyal, Inc.

Donald R. Bryant, Burns, Bryant, Hinchey, Cox & Shea, Dover, N. H., for Town of Madbury, N. H Joseph D. S. Hinkley, Peabody & Arnold, Boston, Mass., for the second mortgage trustee.

John H. Broadley, Dept. of Justice, Washington, D. C., for the U. S.

MEMORANDUM

FRANK J. MURRAY, Senior District Judge.

The Debtor's Trustees have petitioned the court to fix the division of creditors and stockholders in the reorganization proceedings according to the nature of their respective claims and interests, pursuant to Section 77(c)(7) of the Bankruptcy Act (the Act), 11 U.S.C. § 205(c)(7). The Trustees suggested an order of priorities of creditors and stockholders divided into eleven categories, to which objections were filed. The petition and objections came on to be heard by the court, after notice to the Interstate Commerce Commission (ICC) and to all creditors and stockholders, on the several stipulations of the Trustees and certain creditors, the briefs filed by the Trustees and certain objectors, and the oral arguments on behalf of the Trustees and certain creditors.

I. Per diem claims

Thirty-eight railroads¹ and Trailer Train Company (collectively the "interline claimants") object to the classification by the Trustees of their pre-reorganization per diem charges against the Debtor in a category subordinate to the holders of general unsecured claims. The interline claimants seek to have the court establish them as a separate class of creditors with respect to these per diem charges at a high-level priority, or at the very least at priorities under the "six months rule" or "necessity of payment rule". Earlier in the reorganization proceedings against the Debtor the question whether these per diem charges were entitled to priority over the claims of other creditors was raised when the interline claimants sought an order requiring the Trustees to make immediate payment of such charges. This court declined to follow the decision In the Matter of Chicago, R. I. & P. R. Co., 537 F.2d 906 (7th Cir. 1976), cert. denied 429 U.S. 1092, 97 S.Ct. 1102, 51 L.Ed.2d 537 (1977) (Rock Island) on the priority issue, and denied the interline claimants' petitions. In the Matter of Boston and Maine Corporation, Debtor, 456 F.Supp. 412 (D.Mass.1978). On the instant petition the interline claimants have again urged certain contentions which they raised in the earlier proceedings. Ordinarily, consideration of the same arguments would not be entertained. However, because the court is now called upon for the first time to undertake its statutory duty under section 77(c)(7) to fix the division of creditors and stockholders "for the purposes of the plan of reorganization and its acceptance", id., it will not foreclose reconsideration of the arguments.

Interline claimants are not entitled to special priority

Pre-reorganization per diem charges are part of the operating expenses of the railroad, are unsecured debts within the meaning of the Bankruptcy Act 11 U.S.C. §§ 1(14), 205(b), and are entitled to no designated preferred priority among the debts of the railroad in reorganization. Neither the Bankruptcy Act nor the Interstate Commerce Act, 49 U.S.C. § 1 et seq., specifically provides for priority status of per diem claims over claims of other creditors.² There is no explicit general order of the ICC directing the trustee of a railroad in reorganization to pay pre-reorganization per diem charges; there is no specific order of the ICC requiring the Trustees of this Debtor to pay such charges. There has been no demonstration that the interline carriers, some of them competitors of the Debtor, conferred on the Debtor such special benefits by the services for which the per diem charges were made as to equitably entitle them to a preference over all other creditors. The view of the Third Circuit that with respect to pre-reorganization per diem charges interline claimants are entitled to no higher priority than other unpaid suppliers of goods and services delivered prior to the filing of the petition in reorganization, In re Penn Central Transportation Company, 486 F.2d 519, 528 (3rd Cir. 1973), cert. denied 415 U.S. 990, 94 S.Ct. 1588, 39 L.Ed.2d 886 (1974); Matter of Penn Central Transportation Company, 553 F.2d 12, 15 (3rd Cir. 1977), correctly appraises the interests of the interline claimants in relation to other creditors.

Relying on Rock Island the interline claimants contend, however, that because of the mandatory nature of certain ICC orders prescribing per diem rates and rules for the settlement of per diem accounts, the court must distinguish between the asserted singular nature of their per diem charges and claims of other creditors in any priority classification of creditors. As previously pointed out in this memorandum, this court declined to follow Rock Island on the priority issue, and there is nothing in the presentations made on the instant petition to persuade the court to change its views (1) that the rationale of Rock Island does not support a preferred priority status for per diem charges of approximately $8,018,000 for services performed before August 1, 1969, and (2) that to accord preferred priority to per diem charges of approximately $564,000 for pre-reorganization services rendered after August 1, 1969 would result, in the absence of clear and specific statutory authority and policy, in insulating interline carriers as creditors from the strictures of section 77 contrary to the intent of Congress.³

Any consideration of the extensive powers of the reorganization court under section 77 to control and adjust the claims of creditors must take account of the traditional bankruptcy goals of that section: rehabilitation of the debtor and equitable distribution of the debtor's property to creditors. See New Haven Inclusion Cases, 399 U.S. 392, 420, 90 S.Ct. 2054, 26 L.Ed.2d 691 (1970). By the terms of section 77(c)(7), the traditional bankruptcy function of establishing priorities among creditors is exclusively that of the reorganization court, and not a function of the ICC.⁴ Thus, the contention that the court's power to determine the priority of distribution of the property of a debtor in reorganization to a class of interline creditors in relation to the claims of other creditors has been circumscribed by the superseding authority of ICC, carries a very heavy burden of persuasion. That burden has not been met by the interline claimants; with respect, the court declines to follow the reasoning of the Rock Island court on the issue. Rather, the court concludes that proper consideration of the clear and specific applicable provisions of section 77, and its underlying policies, requires the ruling that the court is vested with the authority to determine the claims for special priority of pre-reorganization per diem charges and the classification of the interline claimants. Accordingly, for the reasons stated, the court determines that the interline claimants are not a special class of creditors entitled to special priority.

II. Six Months Rule

The interline claimants and certain other creditors⁵ holding unsecured claims seek to have their claims approximating $3,000,000 accorded special priority under the so-called "six months rule". Debtor's Trustees contend that establishment of a separate class of creditors to be accorded priority as "six months creditors" is not justified under the circumstances of the case. In general, the parties are in agreement as to the origin of the rule and its elements; they do not entirely agree as to its intended application. They agree that it was made applicable to railroad reorganization proceedings by section 77(b), which provides in pertinent part:

. . . 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.

The rule was first enunciated in Fosdick v. Schall, 99 U.S. 235, 25 L.Ed. 339 (1879). Since that time the rule has been applied in numerous cases, resulting in many inconsistencies among the decisions of courts below the Supreme Court. Compare, e. g., In the Matter of Penn Central Transp. Co., 458 F.Supp. 1234 (E.D.Pa.1978) ("Penn Central") and In the Matter of New York, New Haven and Hartford R. Co., 278 F.Supp. 592 (D.Conn.1967) ("New Haven") aff'd, 405 F.2d 50 (2d Cir. 1968), ...