Penn Cent. Tr. Co. v. National City Bank of Cleveland, Ohio
| Decision Date | 05 August 1970 |
| Docket Number | No. 70-347.,70-347. |
| Citation | 315 F. Supp. 1281 |
| Parties | In the Matter of Penn Central Transportation Company, Debtor. PENN CENTRAL TRANSPORTATION COMPANY v. NATIONAL CITY BANK OF CLEVELAND, OHIO, et al. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Dechert, Price & Rhoads, Owen B. Rhoads, George J. Miller, Philadelphia, Pa., for Penn Central Transportation Co.
Jones, Day, Cockley & Reavis, Cleveland, Ohio, Montgomery, McCracken, Walker & Rhoads, Philadelphia, Pa., for National City Bank of Cleveland, Ohio.
Bullitt, Dawson & Tarrant, Louisville, Ky., White & Williams, Philadelphia, Pa., for Citizens Fidelity Bank & Trust Co.
Dickinson, Wright, McKean & Cudlip, Detroit, Mich., Montgomery, McCracken, Walker & Rhoads, Philadelphia, Pa., for National Bank of Detroit, Mich.
Nixon, Hargrave, Devans & Doyle, Rochester, N. Y., Louis Lipschitz, Philadelphia, Pa., for Lincoln Rochester Trust Co., Rochester, N. Y.
Sullivan & Cromwell, New York City, Wolf, Block, Schorr & Solis-Cohen, Philadelphia, Pa., for Marine Midland Grace Trust Co., New York City.
White & Williams, Philadelphia, Pa., for Central Penn Nat. Bank, Philadelphia, Pa.
Robert B. Barnhouse, Baltimore, Md., for First Nat. Bank of Maryland, Baltimore, Md.
Foley & Lardner, Milwaukee, Wis., Wolf, Block, Schorr & Solis-Cohen, Philadelphia, Pa., for First Wisconsin Nat. Bank of Milwaukee, Wis.
Frost & Jacobs, Cincinnati, Ohio, White & Williams, Philadelphia, Pa., for Central Trust Co. of Cincinnati, Ohio.
On June 21, 1970, this Court, per Kraft, J., entered an order approving the petition of the Penn Central Transportation Company for reorganization under section 77 of the Bankruptcy Act (11 U.S.C. § 205, et seq.). Paragraph 10 of the Order (Order No. 1) provided in part as follows:
The Order further provided, in paragraph 7, that such depositories of funds of the debtor were authorized to honor all checks, drafts and vouchers drawn by the debtor against its bank accounts, without regard to the fact that the reorganization petition had been filed and approved. By further orders entered on June 23 and 24, 1970, it was made clear that the honoring of checks and drafts would be without prejudice to any claim the banks might have to priority, by reason of any alleged right of setoff which would otherwise have existed, or otherwise.
When the reorganization petition was filed, the debtor had many millions of dollars on deposit in some 142 bank accounts scattered throughout the United States. Telegrams were sent to each of these 142 banks, advising them of the filing of the reorganization petition, its approval by the Court, and, specifically, the provisions of paragraphs 10 and 7 of the Court's Order.
Notwithstanding the foregoing facts, nine of the banks involved made bookkeeping entries which purported to set off the debtor's funds against various loans allegedly due the banks, and refused to honor checks drawn on such accounts. The total amount of these purported setoffs is in excess of $4,500,000.
On July 14, 1970, the debtor filed a verified petition and obtained an order, returnable July 23, 1970, directing the nine respondent banks to show cause why the Court should not adjudge them in contempt of the Order of June 21, 1970, and require them to honor forthwith the debtor's withdrawals to the full extent of the funds on deposit. The respondent banks, and the approximate amount retained by each, are as follows:
National City Bank of Cleveland, Ohio
$950,000
Citizens Fidelity Bank and Trust Company
Louisville, Kentucky 60,000
National Bank of Detroit, Michigan
1,000,000
Lincoln Rochester Trust Company
Rochester, New York 59,000
Marine Midland Grace Trust Company
New York City 206,000
Central Penn National Bank, Philadelphia
Pennsylvania 1,800,000
First National Bank of Maryland,
Baltimore, Maryland 142,000
First Wisconsin National Bank of
Milwaukee, Wisconsin 220,000
Central Trust Company of Cincinnati,
Ohio 75,000
A hearing was held on July 23, 1970, and evidence and oral argument were presented.
It is conceded that, with one exception, all of the setoffs took place after the respondent banks had actual notice of the filing of the reorganization petition and its approval by the Court, although in several instances, the bookkeeping entries were made before receipt of the telegram which specifically advised of the contents of paragraphs 10 and 7 of the Order. In the case of National City Bank of Cleveland, Ohio, a substantial portion of the setoff occurred on June 20, 1970, before the debtor filed its reorganization petition; however, this bank entered a further setoff of some $27,000 on June 22, 1970, after actual notice of the filing and approval of the reorganization petition.
With respect to all of the post-petition setoffs, the respondent banks raise substantially similar arguments: it is contended that the Order of June 21, 1970 was invalid because entered ex parte; that the Court was without jurisdiction to enjoin setoffs in a summary proceeding; that the banks' right of setoff under section 68 of the Bankruptcy Act (11 U.S.C. § 108) can be infringed, if at all, only after the issues are fully litigated in a plenary action. Some of the banks further contend that such plenary action can only be brought in the jurisdiction where the particular bank is located.
All of the respondents' contentions overlook the distinctions between ordinary bankruptcy proceedings and reorganization proceedings in general, and the further distinctions between a Chapter X reorganization proceeding and the special provisions of section 77 relating to railroad reorganizations. An ordinary bankruptcy is directed toward the liquidation of the debtor's business, and the distribution of the debtor's assets among its creditors. A Chapter X reorganization is directed toward the continuation of the debtor's business so that it may be restored to solvency, and its creditors ultimately satisfied. A railroad reorganization under section 77 of the Bankruptcy Act involves an additional element, the overriding public interest in the continuation of rail transportation services. See In re Central Railroad Company of New Jersey, 273 F.Supp. 282 (D.N.J.1967) aff'd 392 F.2d 589 (3rd Cir. 1968).
Even in an ordinary reorganization under Chapter X, the right of setoff referred to in section 68 of the Act is not automatic, but is available only if the bankruptcy court, in its discretion, determines that permitting the setoff would not frustrate the reorganization process. Susquehanna Chemical Corp. v. Producers Bank and Trust Co., 174 F.2d 783 (3rd Cir. 1949). Clearly, the banks' alleged rights of setoff cannot be regarded as automatic or paramount in a railroad reorganization, in view of the absolute necessity of continuing the operation of trains. See Lowden v. Northwestern National Bank and Trust Co., 298 U.S. 160, 56 S.Ct. 696, 80 L.Ed. 1114 (1936). It follows that the ex parte Order here involved did not deprive the respondents of any absolute legal right.
The power of the bankruptcy court to proceed summarily in this situation cannot be doubted. As long ago as Continental Illinois National Bank and Trust Co. of Chicago v. Chicago-Rock Island & Pacific Ry. Co., 294 U.S. 648, 55 S.Ct. 595, 79 L.Ed. 1110 (1935), the Supreme Court held that such power is firmly established, on the basis of the inherent power of a court of equity to protect its jurisdiction, on the basis of the All Writs Statute, 28 U.S.C. § 1651, and on the basis of section 2(15) of the Bankruptcy Act itself. (11 U.S.C. § 11 (15))...
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