Southern Railway Company v. United States

• Decision Date: 19 July 1962
• Docket Number: No. 19257.,19257.
• Parties: SOUTHERN RAILWAY COMPANY and Morgan Guaranty Trust Company of New York, as Trustee, Appellants, v. UNITED STATES of America et al., Appellees. UNITED STATES of America, Appellant, v. SOUTHERN RAILWAY COMPANY and Morgan Guaranty Trust Company of New York, as Trustee, Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

306 F.2d 119 (1962)

SOUTHERN RAILWAY COMPANY and Morgan Guaranty Trust Company of New York, as Trustee, Appellants, v. UNITED STATES of America et al., Appellees.

UNITED STATES of America, Appellant, v. SOUTHERN RAILWAY COMPANY and Morgan Guaranty Trust Company of New York, as Trustee, Appellees.

No. 19257.

United States Court of Appeals Fifth Circuit.

July 19, 1962.

COPYRIGHT MATERIAL OMITTED

Earl E. Eisenhart, Jr., Washington, D. C., Emory F. Robinson, Gainesville, Ga., Charles J. Bloch, Ellsworth Hall, Jr., Macon, Ga., Robert B. Thompson, Gainesville, Ga., for appellant, Southern Ry. Co.

E. D. Kenyon, Wm. B. Gunter, Gainesville, Ga., Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Atty., Dept. of Justice, Washington, D. C., Charles L. Goodson, U. S. Atty., Slayton Clemmons, Asst. U. S. Atty., Atlanta, Ga., Frederick E. Youngman, Moshe Schuldinger, Attys., Dept. of Justice, Washington, D. C., for appellees.

Before BROWN and WISDOM, Circuit Judges, and DE VANE, District Judge.

JOHN R. BROWN, Circuit Judge.

This case is a piece of Americana. It comes face to face with three markers of our early 20th century civilization — railroads, railroad financing, and equity receiverships. And as to the first and third, it marks the end of a railroad and the equity receivership that kept it going for over thirty-five years. Typical of the dissatisfactions which brought about complex bankruptcy reorganization machinery, this receivership seems finally to have become almost an end in itself. And, as with so many others, while well run and contributing undoubtedly to the regional economy, when it is all over, what is left is but a pittance. So small is the salvage that, as another mark of the era, once the expenses of court functionaries and their various counsel were out of the way and the more substantial cumulative claims of the ubiquitous and ever-patient tax collectors, national, state and local, were taken care of, there was nothing left for the ordinary business creditors or, for that matter, even for the mortgage bondholders. On the present order, therefore, the railroad was run for the Receiver and the tax collectors.

The Railroad whose demise is memorialized by our decree was the Tallulah Falls Railway Company. It ran for 58 miles from Cornelia, Georgia, up through Tallulah Falls — from whence its name came — and surrounding scenic country, then on through Clayton and Dillard, Georgia, terminating at Franklin, North Carolina. History undoubtedly bears out what we were told, that for a long time this Railroad was the busy and principal means of transportation as vacationers went to and from this popular scenic summer resort area. But it was more important than it was profitable. And, it is an understatement to say, its end — fiscal and physical — was long in coming.¹ On March 10, 1909, all of the properties of the Railroad were put under a first mortgage to secure bond in the amount of $1,519,000. Within a year's time the bonds were in default and never thereafter was a single dime paid on principal or interest. Sixteen years later this Federal Court receivership began in 1926. When the decree of foreclosure was entered, February 28, 1961, this paper debt amounted to $5,430,425. But on a carefully constructed sale by units with extensive advertising across the nation all the railroad brought was $302,000.

After first ordering the payment of $35,733.60 for Receiver's, attorneys', commissioners' fees, etc., the balance for distribution was only $262,526.48. Thus the receivership, precipitated in 1926 by the trustee to secure enforcement of the mortgage bonds, ended up with less than a 17% of the original face of the bonds and 4.8% of principal and accumulated interest. But from the standpoint of the mortgage bondholders for whom the suit had been filed, the receivership maintained, and the properties operated, it turned out to be even worse than that. For the Court allowed the tax claims of the United States and various State political entities to share pro rata the whole of this balance as partial, but preferential, payment of their allowed claims aggregating $311,099.30.

The disappointed business creditor and the holder of all bonds is now one party, Southern Railway Company. Save for inconsequential amounts denied to the trustee and its New York counsel, Southern is the principal appellant. The Federal Government cross-appeals as to the District Court's allowance of a fee to Charles Bloch, Esq., the local and leading counsel for the trustee, Southern and the bondholders.

Southern's claim as a creditor is made up of two principal amounts. The first is the Traffic Balance claim in the net sum of $139,657.52.² The other is the Operating Expense claim in the amount of $106,016.65.³ The District Court, as had the special Master, allowed each of these claims. But it found that the tax claims had a priority over either one or both of them. Consequently, the Court, while impliedly approving the Master's holding that the Traffic Balance claim was not in the nature of a trust fund, held that it was in any event inferior to the tax claims. Thus Southern, as creditor and as bondholder, lost out altogether. As bondholder Southern's principal contention is that the mortgage lien is superior to tax claims so there can be no question of equitable priority or apportionment. Failing in that status, Southern, as creditor, then raises substantially these questions in the main contest between it and the governmental tax claimants. Does the Traffic Balance claim constitute a trust fund entitling it to priority over all other creditor claimants? If not, what is the relative priority as between the tax claims, on the one hand, and either one or both of the claims of Southern, as creditor?

Traffic Balance Claim

This grows out of the interchange of freight at Cornelia, Georgia, between Southern and the receivership Railroad. The two carriers had a junction settlement arrangement under which freight interchanged was re-billed at Cornelia. On traffic moving inbound to the Tallulah Falls, Southern paid all prior participating carriers their divisions or proportions of the revenue for traffic handled over their lines. For these advances as well as for its own division or proportions of the inbound freight charges, Southern looked to the Receiver for reimbursement and payment. As to such inbound shipments, the Receiver would, and did, collect the freights from consignees. On movements out-bound from the Tallulah Falls, the destination carrier collected the freight charges and paid over to Southern the share due it as well as the Tallulah Falls. The settlement arrangement called for adjustment four times a month. On striking the balance, payment was to be made by, or to, the Receiver or Southern as the case might be.

While the formal record is sketchy on the point, we get the impression that the trouble with this account started in 1958. The Receiver was apparently making a strenuous effort in the maintenance and repair of the Railway properties to overcome the deficiencies which made the Railroad simply unsafe to operate. Safety considerations ultimately led to the Court's insistence, and the Interstate Commerce Commission's concurrence, that the Railroad be abandoned. It is clear that the account first became in arrears in June 1958. By August 1958, it had increased to over $21,000; in November $37,000; by October, 1958, $105,000; and the maximum of $152,000 was reached in September 1960. Of course, Southern was aware of what was going on.

On September 30, 1960, Southern filed C.A. 871 seeking a judgment for the balance due and injunctive relief requiring the Receiver to segregate so much of the freight moneys collected from the consignees as represented the amounts "collected for or on behalf of or belonging to * * * Southern." On October 24, 1960, the Court entered a partial judgment in C.A. 871. The Court found that the Receiver had repeatedly advised Southern that he was unable to make the payments, but though this condition continued, no specific demand for segregation of funds was made until about May 1960. The Court also found that the Receiver had used "portions of funds collected as freight revenue * * * belonging to Southern * * * for the operation of the receivership properties." And in a conclusion of law the Court declared that "The amounts collected by the Receiver for the account of Southern * * * under what is known as the junction settlement arrangement constitute trust funds and * * * are collected by the Receiver as the property of * * * Southern * * * and are its property." Part of the relief granted was a requirement that such collections be segregated. This was done.⁴

But it should be pointed out that only Southern and the Receiver were parties to C.A. 871. The taxing authorities were not actual parties. Presumably because of this the Court, after granting summary judgment on March 2, 1961, for foreclosure of the mortgage, entered an additional supplemental decree in C.A. 871 on March 10, 1961. The Court fixed the sum with interest due by the Receiver, but in connection with the prayer of Southern that the Court "adjudge, decree and declare the rights and legal relations of the parties * * * and particularly that the Court declare that the monetary judgment herein rendered should be superior to the claims of the Receiver and his attorney," the Court declined to make such declaration. It expressly held that "The rank of the judgment in that respect, as well as its priority in the distribution of funds which are or may hereafter come into the hands of the Receiver for distribution under the orders of this Court, shall remain for future determination by the Court." It is that "future determination" subsequently made which is the dispute here. Whereas in C.A. 871, as between the Receiver and Southern, the Court held the collections to have been "trust funds" the special Master rejected "the...