# Petition for Writ of Certiorari — Louisville & Nashville Railroad v. Rodes > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_1134%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1972 - **Citation:** 409 U.S. 893 ## Text $1-1680 Sion: teint aa JUN 23 1g72 SUPREME GOURT OF THE UNITED)SHAZES ou. cue OCTOBER TERM, 1971 No. 71 In the Matter of TENNESSEE CENTRAL RAILWAY COMPANY, Debtor. LOUISVILLE AND NASHVILLE RAILROAD COMPANY, ILLINOIS CENTRAL RAILROAD COMPANY, SOUTHERN RAILWAY COMPANY, et al., Petitioners, v. A. BATTLE RODES, Trustee of Tennessee Central Railway Company, et al., Respondents. PETITION FOR A WRIT OF CERTIORARI To the United States Court of Appeals for the Sixth Circuit K. HARLAN DODSON HOOKER, KEEBLE, DODSON & HARRIS 900 Nashville Trust Building Nashville, Tennessee 37201 WILLIAM F. BUNN 135 East Eleventh Place Chicago, Illinois 60605 DUNCAN B. PHILLIPS P. O. Box 1808 Washington, D.C. 20013 CHARLES A. HORSKY 888 16th Street, N.W. Washington, D.C. 20006 Attorneys for Louisville and Nashville Railroad Company, Illinois Ceniral Railroad Company, Southern Rail- way Company, and Eleven Other Petitioners Of Counsel PHILIP M. LANIER P. O. Box 1198 Louisville, Kentucky 40201 DAVID M. KEEBLE 900 Nashville Trust Building Nashville, Tennessee 37201 St. Louis Law Printing Co., Inc., 411-15 N. Eighth St. 63101 314-281-4477 INDEX Page EE Coe Shh avn neeh cenedenswstuws taelwsia a 1 ea ecg seu w Nan wie aden oo ee Ss 60% 2 SE ES a PT 2 ee i idvh sek wakteeeneesieabees ane 3 Statement of the case ............ eee tT ante 4 Reasons for granting the writ ..............0.eee0e- 8 Appendix: A. The Opinion of the Court of Appeals for the etic ced ah mene pee komen 6 Keene A-1 B. Dissenting Opinion of Judge Paul Weick ...... A-16 C. The Opinion of the District Court ............. A-21 D. The Judgment of the District Court ........... 47 E. The Order denying the Petition for Rehearing .. 53 F. The relevant sections of 77 of the National Bank- ruptey Act (11 U.S.C., §205) .................. 54 G. B.S., $3466 (31 U.S.C. 191) .............cccceee 56 Es ce vnbepeieWdbdstsebesedwee es 57 I. The relevant sections of Reorganization Plan No. 1 of 1957, 22 F.R., §4633, 71 Stat. 647 .......... 58 J. Relevant section of §77 (1933), 47 Stat. 1474 ... 60 Cases Cited Mellon v. Michigan Trust Co., 271 U.S. 236 .......... 15 Southern Railway v. Flournoy, 301 F. 2d 847 (4th i hvka ci ebinds ke Rides one eed s0elende sss se 5 United States v. Emery, 314 U.S. 423 ............... 13 United States v. Guaranty Trust Co., 280 U.S. 478 ... 15 United States v. Key, 397 U.S. 322 .............. 11, 13, 14 ae MSE OAT PRY ARES NV RAR eA RRC RTD ag range Statutes Cited es oe 3, 4, 6, 7, 8, 11, 12, 13, 14 ER i eg a a 2, 3, 8,9, 10 PENN oo ye in ae 2 OR BR ita enero rae 2,3, 7,9 REET een Acer Eee 12 Pub. L. 89-554, §8(a) (Schedule of Laws Repealed), Sept. 6, 1966, 80 Stat. 378 (Recodification of Titles) 2 Reorganization Plan No. 1, 1957, June 30, 1957, 22 es Gy CE MU ov cdenccscescenewscsvccces 2, 3,8 ae IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM, 1971 No. 71 In the Matter of TENNESSEE CENTRAL RAILWAY COMPANY, Debtor. LOUISVILLE AND NASHVILLE RAILROAD COMPANY, ILLINOIS CENTRAL RAILROAD COMPANY, SOUTHERN RAILWAY COMPANY, et al., Petitioners, Vv. A. BATTLE RODES, Trustee of Tennessee Central Railway Company, et al., Respondents. PETITION FOR A WRIT OF CERTIORARI To the United States Court of Appeals for the Sixth Circuit OPINIONS BELCW The opinion of the Court of Appeals and the opinion of Judge Paul C. Weick dissenting from the denial of re- hearing are not yet officially reported, but are set out in the Appendix to this petition at pages A-1-A-20.1 The opinion of the District Court is set out in the Appendix at page A-21, and is reported at 316 F.Supp. 1103. The judg- ment of the District Court is set out in the Appendix at page A-47. 1 The opinion of Judges Edwards ard Peck, two members of the original panel assigned to this case, was filed February 2, 1972. The third member of said original panel, Judge Henry L. Brooks, died while the case was under consideration, on December 30, 1971. On the petitions to rehear, Judge Paul C. Weick was appointed to fill out the panel, aa . a NIGP Ha AE RY RMR we Ae Sr ng a ae hag AIH AGES S a eS ~ JURISDICTION The opinion and order of the United States Court of Appeals for the Sixth Circuit was entered on February 2, 1972 (Appendix, pp. A-1-A-15); a timely petition for re- hearing, was denied on April 4, 1972 (Appendix, p. A-53). The jurisdiction of this Court is invoked under 28 U.S.C. § 1254(1). QUESTIONS PRESENTED 1. Did the repeal, in the Reorganization Act of 1966? (nine years after the abolition of the RFC,’ and nine years after the transfer of RFC notes to the Secretary of the Treasury), of 15 U.S.C., § 603, which expressly denied gov- ernmental priority under 4 3466 to RFC loans of the type herein involved, suddenly endow such RFC notes with a priority status nonexistent over the years. 2. In any event, is § 3466 (31 U.S.C. $191) applicable to railroad reorganization proceedings under 477 of the Bankruptcy Act? 3. A third question was pretermitied by the majority opinion of the Court of Appeals ;* Are claims of connecting carriers for interline charges, accruing within six months before institution of reorgan- ization proceedings under § 77, accorded priority in such proceedings, ahead of mortgagee claims, irrespective of whether or not there was diversion of current income? 2 Pub. L. 89-554, § 8(a) (Schedule of Laws repealed), Sept. 6, 1966, 80 Stat. 378; (Recodification of Title 5). 8 Reorganization Plan No. 1, 1957, June 30, 1957, 22 F.R. 4633, 71 Stat. 647. 4 The District Court held in petitioners’ favor on this ques- tion and Judge Weick, in his dissenting opinion, concurred. men tet FSG BLS = STATUTES INVOLVED The relevant sections of § 77 of the National Bankruptcy Act (11 U.S.C. § 205), (App. A-54); § 3466 (31 U.S.C. §191), (App. A-56); 15 U.S.C. § 603, (App. A-57); the rele- vant sections of Reorganization Plan No. 1 of 1957, effec- tive June 30, 1957, 22 F.R. 4633, 71 Stat. 647, (App. A-58, 59); relevant portion of original § 77 (1933), 47 Stat. 1474, (App. A-60); are set forth in the appendix as indicated. ae NOGA ALINE MNS IRENE RRP RESTS HONS IONS 4 us = 7 STATEMENT OF THE CASE On December 14, 1967 the Tennessee Central Railway Company filed a petition for reorganization under §77 of the Bankruptcy Act, thus invoking the juris- diction of the United States District Court for the Middle District of Tennessee, Nashville Division. On September 22, 1969 the Trustee of the Debtor petitioned the District Court to determine, inter alia, the order of priority of various claimants. After a hearing, the court concluded that Petitioners herein, claiming recovery for interline balances® accruing within six months before the filing of the petition for reorganization, had priority over a claim asserted by the United States arising out of a loan to the Debtor by the Reconstruction Finance Corporation (RFC). The circumstances, in more detail, are not in dis- pute, and may be summarized as follows:* On April 1, 1937, the RFC loaned the Tennessee Central Railway Company $5 million, the loan being secured by $5.5 million face amount of First Mortgage bonds of the railroad company. In 1953 the Tennessee Central, in- duced by promises from the Tennessee Valley Authority (TVA) of substantial coal purchases from certain coal fields in Putnam County, Tennessee, with the aid of fur- ther loans from the RFC totaling $2,148,900, bought sub- stantial additional rolling stock and constructed an ex- pensive line of track in Putnam County. A few months after these expenditures the TVA discontinued its coal purchases. 5 Two of petitioners, with relatively small claims, are car rental companies. 6 At the hearing before the trial court, at the Court’s sug- gestion and by agreement, in lieu of presenting witnesses, af- fidavits of witnesses were filed by claimants and by the Gov- ernment, said affidavits to be treated as testimony (Joint App., hereinafter referred to as J.A., pp. 20-21), , 2 a gi ITS Gy) SA 7" — In January 1967 the Government agreed to extend the due date of its loans to December 31, 1967. At the time this extension agreement was reached, the Government was bound to have had full knowledge of the very pre- ca..ous financial condition of the Tennessee Central. For the year 1966, the Tennessee Central had an operating deficit of approximately $1.2 million, and it experienced equally alarming deficits for the years preceding 1966. In July and August of 1967, an official of the Tennessee Central contacted the Illinois Central, the Southern Rail- way, and the Louisville and Nashville Railroad Company’ for the purpose of inducing those railroads not to draw a draft on the Tennessee Central for interline balances due said railroads and not to put the Tennessee Central on a prepaid basis. At that time the Tennessee Central had hopes of some financial rearrangement that would permit continued operations without the necessity of re- organization or liquidation in bankruptcy. At these talks there was recognition of the priority rights of the rail- roads’ claims for interline charges accruing within six months prior to filing a bankruptcy or reorganization petition, pursuant to the so-called ‘‘Six Months Rule’’ (J.A. pp. 254/262). Representatives of some of the con- necting carriers testified that such carriers did not put the Tennessee Central on a ‘‘prepaid’’ or ‘‘cash’’ basis until it became known that Tennessee Central was going to file in bankruptcy, because of their reliance on the principle announced in the case of Southern Railway v. Flournoy, 301 F. 2d 847 (4th Cir. 1962), and other similar decisions holding that claims of carriers in a reorganiza- tion proceedings are entitled to priority with respect to interline freight items and similar charges accruing dur- ing the six months preceding the filing of a petition for reorganization of a railroad (J.A. pp. 254/262). 7 The claims of these railroads were the largest interline bal- ance claims and constitute the bulk of such claims in these pro- ceedings Dita: sccarvcrseenvenenresmecremmmmamence mes —_ All hope of refinancing fell through, and by late fall of 1967 bankruptcy was inevitable. The petition under § 77 and an order approving the petition were both en- tered December 14, 1967. The reorganization has resulted in the sale of the Debtor’s rail lines to three connecting carriers with no substantial interruption of rail services (See 304 F. Supp. 289 (M.D. Tenn. 1969), with a total realization of approximately $3 million (J.A. pp. 4 and 17)). As of March 24, 1972, the Government’s claim on the RFC notes was $5,200,449.23 (J.A. p. 384)—far in excess of assets in the hands of the Trustee. If the priority asserted by the United States is sustained, Petitioners will receive nothing on interline balance claims totaling ap- proximately $900,000.§ The District Court (William E. Miller, Circuit Judge, sitting by designation), held that Petitioners and certain other claimants were entitled to priority under the ‘‘Six Months Rule’’, stating: ‘‘Operating on a ‘pre-paid’ basis requires a greater degree of liquidity than financing on the ‘collect’ basis. e e o s o eo s “*It is clear that the Tennessee Central would have been placed in serious financial difficulties if all ship- ments which it handled were placed on a ‘pre-paid’ basis by other carriers’’ (App. A-28). 8 The character and importance of interline balances are particularly demonstrated in the Tennessee Central proceedings. For example, the T.C., being a very short line railroad, picked up many shipments to Chicago and beyond which it carried only a few miles and interchanged such shipments to the L&N or the Illinois Central. The T.C. collected the full freight tariff, even though it earned only a small fraction thereof, the balance being owed the connecting carrier. —_ wo ‘‘The equities in this case favor the priority of the carriers. Their extension of credit preserved the corpus of the mortgaged railroad by maintaining it as a ‘going concern’ and at the same time enabling the area formerly served by the Tennessee Central to - enjoy continued rail service, thereby carrying out the expressed purposes of the railroad reorganization section of the National Bankruptcy Act’’ (App. A-35). The Trial Judge also held that 4 3466 (31 U.S.C. § 191) was inapplicable to a railroad reorganization proceedings under § 77 of the Bankruptcy Act. On appeal the decision was reversed. The Court of Ap- peals did not reach the issue as to the Six Months rule priority asserted by Petitioners, holding rather that § 3466 was applicable and that a decision on any other priorities was therefore unnecessary. A timely petition for rehearing was denied. PLT IAEA TTI | AEE SORES ARES TTS, ~~ REASONS FOR GRANTING THE WRIT The claims by Petitioners herein were denied by the court below by assigning a greater priority to the claim asserted by the United States under R.S. 3466. In so do- ing, the court has decided an issue of general importance in &@ way which is clearly contrary to the intention of Congress in two respects: (1) it permits a priority under § 3466 to debts arising from loans made by the Recon- struction Finance Corporation, which were expressly de- nied such priority by the Congress; and (2) it applies § 3466 in a §77 reorganization, again contrary to Con- gressional intent. We deal with the two points in that order. I It is not in dispute that in Section 603 of Title 15, U.S.C., the Congress provided that ‘‘Debts due the (Re construction Finance) Corporation, whether heretofore or hereafter arising, shall not be entitled to the priority available to the United States pursuant to 4 191 of Title 31 (B.S. 3466)’ with exceptions not here relevant. The United States argues, however, that since the Reconstruc- tion Finance Corporation was abolished by Reorganization Plan 1 of 1957 (22 F.R. 4633, 71 Stat. 647), and the RFC loan transferred to the Secretary of the Treasury, and since in the recodification of Title 5 of the United States Code in 1966, § 603 was repealed, the loan is now one to which § 3466 applies. Such was the view of the court below. The argument is subject to at least two fatal flaws. First, the Reorganization Plan itself provided (Section 2(d)) that the Secretary of the Treasury as transferee from the RFC was vested only with the same “powers, authority, rights and immunities now vested in or avail- ~ = able to the corporation ...’’. In 1957, when the transfer occurred, it is undeniable that the loan to Temnessee Cen- tral carried no § 3466 priority; that was explicit in § 603. The subsequent repeal of § 603 is immaterial; the Secre- tary of the Treasury received only whatever rights were “now vested”’ in the RFC itself. To allow the loan a § 3466 priority now is obviously to contravene the conditions of the transfer. Second, it is abundantly clear that Congress did not intend, by the recodification of Title 5, in which 4603 was repealed, to change pre-existing priorities of RFC loans. In the report of the House Judiciary Committee on the bill (H.R. Rep. No. 901, 89th Cong., 1st Sess.), the in- tention not to make substantive changes in the law is made express (p. 1): ‘*The purpose of this bill is to restate in compre- hensive form, without substantive change, the statutes in effect before July 1, 1965, that relate to Govern- ment employees, the organization and powers of Fed- eral agencies generally, and administrative procedure, and to enact Title 5 of the United States Code’’ (Italics supplied.) And again (p. 3): ‘* Substantive changes not intended.—Like other re- cent codifications undertaken as a part of the program of the Committee . . . to enact into law all 50 titles of the United States Code, there are no substantive changes made by this bill enacting Title 5 into law.”’ (Italics supplied.) The table of ‘‘Laws Omitted and Repealed’’ (Table II to the Committee report, pp. 251-519), contains the fol- lowing note with respect to § 603 (p. 390): ““Obsolete. Pro- vided for powers of Reconstruction Finance Corporation, including appointment and pay of employees.’’ = }f — The Senate Committee report is to the same effect. §. Rep. No. 1380, 89th Cong., 2d Sess., p. 534. In the light of this history, it is plainly at odds with Congressional intent to assert, as the United States must do, that the repeal of 4603 works a drastic change in the priorities attaching in this proceeding to the RFC loan. No change in substantive law was intended, and none was made because the Secretary of the Treasury received from the RFC no more in the way of priority rights than RFC had itself possessed. As the code revisors re- ported, § 603 was obsolete, because it was no longer neces- sary to define the nature of the RFC loans. We submit that it is unreasonable to conclude that Congress, by such action nine years after the abolition of the RFC, intended to suddenly endow the United States with a debt priority, with respect to the remaining uncol- lected RFC notes, that the United States had not enjoyed over the intervening years. To hold that Congress, by abolishing the RFC, when its activities were reduced to liquidating functions, and transferring those functions to the Secretary of the Treasury, intended, in effect, to retro- actively endow such loans with priority, is to clothe Congress with an undeserved motive of duplicity. Of course, it is not disputed that 15 U.S.C., § 603 was removed from the statute books in the omnibus Reorganiza- tion Act of 1966, nine years after abolition of the RFC and the transfer of its functions to the Secretary of the Treasury. The removal or repeal of that section is not the issue. The important and determinative issue is: What is the legal effect, under the circumstances, of such be- lated removal of that section from the statute books? That issue was not discussed at all in the majority opinion of the Court of Appeals. The only discussion of that issue was in Judge Weick’s dissenting opinion, which, in part, reads: —_— ow fj “Tt was not until nine years later that Congress enacted the Omnibus Reorganization Act repealing hundreds of obsolete statutes, only part of which re- lated to the RFC. We are asked to infer therefrom that Congress intended to restore priority of the United States, thereby displacing the lien of existing mortgage indebtedness of RFC, to the prejudice of priority creditors. It is not believed that Congress in- tended to do any such thing’’. (Appendix, p. A-17) The issue is, of course, of importance beyond this case. Here, the error of the court below awards the entire Ten- nessee Central estate to the United States; petitioners’ claims for $900,000° are wiped out. Further, moreover, the decision on this question sets an important precedent as to governmental rights, inasmuch as it will determine the Government’s rights with respect to other non-defense RFC notes in the hands of the Secretary of the Treasury and raises serious questions as to the equity of attracting participation of private capital by surrendering a statutory priority and subsequently, many years later, reclaiming such priority to the prejudice of non-governmental creditors. Ii The court below also erred, we believe, in holding that— apart from the special situation of RFC loans—{ 3466 was applicable in §77 proceedings. The issue is one of first impression, and one of obvious importance in the ad- ministration of 477. The District Court found § 3466 in- applicable; the court below reversed, but with a vigorous dissent by Judge Weick. The court below felt compelled to its conclusion by the decision of this Court in United States v. Key, 397 US. ® In addition other claims totalling approximately $300,000, including tax claims of certain counties and municipalities, are denied by the decision of the court below. ee ———— a _— 322, which held that 4 3466 applied with respect to a tax claim by the United States in a Chapter X proceeding. With due deference, there is a world of difference between that case and the present one. The purpose of 477 is to maintain in operation, so far as possible, the existing rail transportation system. Such, too, was the purpose of the RFC loans which were made to many railroads during the difficult years following the en- actment of $77. While Chapter X of the Bankruptcy Act also sought to preserve going commercial enterprises which had fallen on bad times, it does not reflect the public interest in the maintenance of an essential national facility which is basic to § 77. This purpose is pro tanto frustrated if the railroads’ ability to obtain credit from private sources is impaired. The Government has made or guaranteed large loans to the railroad industry. The Treasury Department holds loans against railroads, guaranteed by the Interstate Com- merce Commission, which are in default (49 U.S.C. 1233), in the amount of $73,987,000.1° The priority status of such loans is vital to the railroad industry for at least two reasons: (1) If such Government loans have priority ahead of claims for interline balances under the “Six Months Rule”,:connecting carriers may be compelled, for their own protection, to place a debtor rail carrier which is a beneficiary of such a Government loan, and which is experiencing a cash shortage, on a “prepaid” status. In some circumstances, as recognized by the Trial Court, this could ‘place the debtor road “in serious financial diffi- culties.” (2) As stated above, such Governmental priority will seriously impair the railroad’s ability to obtain credit from private sources. 10 Annual report of the Secretary of Treasury for fiscal year ending June 30, 1971, Statistical Appendix, p. 316. = We do not dispute the broad sweep of the language of § 3466, nor the teachings of United States v. Emery, 314 US. 423, that it is to be construed liberally and applied except where a later status is plainly inconsistent with it. Notwithstanding, we believe that it is not intended to apply in §77 cases. In $77 (11 U.S.C. § 205(b}) Congress has provided: “For all purposes of this section unsecured claims, which would have been entitled to priority if a re- ceiver in equity of the property of the debtor had been appointed by a Federal court on the day of the ap- proval 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.” (Emphasis supplied). The District Court’s holding that § 3466 was inappli- cable to § 77 proceedings was based on the above quoted provision. Chapter X has no similar provision. And un- der this section, which is the only section of § 77 dealing with priorities, the limitation is clear—priority is awarded only to unsecured claims which would have had priority in an equity receivership. The claim of the United States in this case is a secured claim, and to give such a claim priority over the unsecured claims of petitioners, which would have had priority in an equity receivership, is di- rectly in conflict with the language of 4 77(b). As Judge Weick pointed out in his dissenting opinion, the majority opinion of the Court of Appeals ‘‘is based entirely on dicta in United States v. Key, 397 US. p. 322.’’ However, such reliance of the lower court was erroneous because the dictum in the Key case indicating that 4 3466 is applicable to § 77 proceedings relates to the original 1933 version of the Railroad Reorganization Act referred to by this court as the precursor of Chapter X. Section 77 was drastically amended and rewritten in 1935 (49 Stat. 911; 11 U.S.C, 205). ca RTS TSS Peer eE eR ey ee eee The Supreme Court in the Key case quoted § 77(e), as follows: ‘**If the United States of America is directly a creditor or stockholder, the Secretary of the Treasury is hereby authorized to accept or reject a plan in respect of the interests or claims of the United States.’ 47 Stat. 14787’. That provision was in the earlier version of § 77, but that provision is not in the rewritten § 77 (1935). The Trial Court’s holding that § 3466 was inconsistent with and inapplicable to the present revised § 77, relied upon and quoted 11 U.S.C. 205(b), quoted hereinabove, which is not contained in the original (1933) version of § 7741 It is submitted, therefore, that the comments in the Key case, relating to the 1933 Railroad Reorganization Act and not the existing 1935 Act, does not constitute dictum of the Supreme Court applicable to the case sub judice. Judge Weick in his dissenting opinion said: ‘‘There is nothing in the court’s opinion (opinion in the Key case) to indicate that it considered amended § 77” (Brackets added). It is respectfully submitted that the majority opinion of the Court below erroneously construed the dictum in the Key case as applicable to the existing (1935) version of § 77, and that without a clarification by this Court of the meaning of its dictum, the opinion of the court below may lead other lower courts to compound that error and make erroneous rulings as to the applicability of 4 3466 to § 77 proceedings—a most important question to the railroad industry. 11 The somewhat analogous provision of the 1933 version of §77 omitted the word “unsecured.” 47 Stat. 1474, Section (c), App. p. 60. — — Moreover, as the dissenting judge below pointed out, the RFC Act itself evidenced an intention by Congress that 4 3466 was not to apply. That Act created other and specific means by which to secure repayment of loans— by obtaining a lien, as was done here. The situation is closely analogous to that presented to the Court by the claim for § 3466 priority made by the United States for advances to railroads during and shortly after Federal control. The Court concluded that Congress had not in- tended 4 3466 to apply, since it had provided other means of securing the Government’s advances. United States v. Guaranty Trust Co., 280 U.S. 478. And see, to the same effect, Mellon v. Michigan Trust Co., 271 U.S. 236. Judge Weick in his dissenting opinion stated: ‘‘In my opinion, to grant the United States priority would conflict witi: two decisions of the Supreme Court which held that claims of the Government for money loaned to railroads during federal control, were not entitled to priority. United States v. Guar- anty Trust Co., 280 U.S. 478 (1930), and Mellon v. Michigan Trust Co., 271 U.S. 236 (1926).”’ Ii As stated hereinabove, the court below pretermitted the question as to the rights of connecting carriers to a priority for interline balances under the so-called ‘‘Six Months Rule’’. The District Court and Judge Weick in his dissenting opinion, having reached that question, found very strong equities justifying and requiring such priority. The challenge to this long existent priority prin- ciple by a litigant with the standing and status of the United States Government has caused deep concern in the railroad industry. It is presumed that if certiorari is granted and the lower court reversed, that this third question will be remanded to the Court of Appeals, but, if this Court a So IRTP RGR EI ee = should elect to pass on this question that it will so indi- cate and Petitioners will be afforded the opportunity to fully brief such issue in its brief on the merits. CONCLUSION The petition for certiorari should be granted. If either of the questions presented is resolved in favor of Peti- tioners, it will be appropriate to remand the proceeding to the court below to review the priority accorded Peti- tioners by the District Court, since a review of the chal- lenge to that priority became unnecessary when the de- cision below in effect eliminated all claimants except the United States. om 1T om Respectfully submitted K. HARLAN DODSON HOOKER, KEEBLE, DODSON & HARRIS 900 Nashville Trust Building Nashville, Tennessee 37201 WILLIAM F. BUNN 135 East Eleventh Place Chicago, Illinois 60605 | DUNCAN B. PHILLIPS P. O. Box 1808 Washington, D. ©. 20013 CHARLES A. HORSKY 188 16th Street, N.W. Washington, D.C. 20006 Attorneys for Louisville and Nash- ville Railroad Company, Illinois Central Railroad Company, Southern Railway Company, and Eleven Other Petitioners Of Counsel: PHILIP M. LANIER P. O. Box 1198 Louisville, Kentucky 40201 DAVID M. KEEBLE 900 Nashville Trust Building Nashville, Tennessee 37201 a APPENDIX A No. 71-1228 United States Court of Appeals For the Sixth Circuit In the Matter of: . Tennessee Central Railway Com- : Debtor, a Appeal from the United States of America, United States Dis- Plaintiff-A ppellant, | trict Court for the v. Middle District of Tennessee. A. Battle Rodes, Trustee of Ten- nessee Central Railway Com- pany, Defendant-Appellee. | Decided and Filed February 2, 1972 Before: Edwards, Peck and Brooks,* Circuit Judges. Edwards, Circuit Judge. This is an appeal from a judg- ment entered in the United States District Court for the Middle District of Tennessee. The issue is whether the federal government has priority in a section 77 railroad reorganization proceeding (11 U.S.C. 4205 (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) (B.S. § 3466), adopted in 1797 giv- ing it priority as to debts due it in any bankruptcy pro- ceeding. The contesting claimants assert equitable pri- * Honorable Henry L. Brooks died on December 30, 1971, = ority because they furnished essentials to the bankrupt for the last six months of its operation before its in- solvency. 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 giv- ing precedence to the equitable priority of the six months claimants. However, in United States v. Key, 397 US. 322 (1969) (a case not argued to the District Court), the United States Supreme Court, acting unanimously, em- phatically affirmed the federal priority accorded by § 3466 in a Chapter X case also concerning a corporate reor- ganization, 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 sec- tion 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. The dictum just quoted, plus the strong analogy be- tween 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 Bank- ruptey Act on December 14, 1967, after several years of operational losses. The Tennessee Central Railway Com- pany has now ceased operations after selling all but a very small portion of its lines to three connecting rail- roads in 1968. Appellees’ claims in this case are for interline charges provided by three connecting railroads, taxes due to local governments, and some diesel oil, wood and similar types of supplies for TCR provided by various private corpora- tions—all related to the six month period before the re- organization proceedings. They totaled approximately $3 million. -_- —T = 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 prin- cipal 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 priori- ties to be assigned to each, held that 4 3466 was inapplica- ble to a section 77 proceeding and that the interline car- riers, 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 con- tinuing 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 ereditor priority rule. We approach decision of this case with the fact in mind that bankruptcy proceedings are among the topics specif- ically couamitted to Congressional power by the Constitu- tion of the United States. Article 1 § 8 of the Constitution says in part: —— PELE ID ESR ATES NTN ne pre pee Rint sea _ ao A.4. “‘The Congress shall have power . . . . @ e **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 B.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 de- ceased debtor, in the hands of the executors or ad- ministrators, 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. RS. § 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 4 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 sec- tion 77(b): ‘“‘For all purposes of this section unsecured claims, which would have been entitled to priority if a re- ceiver in equity of the property of the debtor had — ee 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 su- perseding the effect of § 3466. The situation here is much like that dealt with in United States v. Emory, 314 USS. 423 (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 creditors’ pe- tition a receiver was appointed to liquidate the corpo- rate 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 Bank- ruptey Act, U.S. C., Title 11, § 21(a) (4). ~ Just such proceedings as this, therefore, are gov- ~ erned by the plain command of § 3466 that ‘debts due to the United States shall be first satisfied.’ The pur- pose of this section is ‘to secure adequate public rev- enues to sustain the public burden’ (United States v. State Bank of North Carolina, 6 Pet. 29, 35), and it is to be construed liberally in order to effectuate that purpose (Bramwell v. U. S. Fidelity & Guaranty Co., 269 U. S. 483, 487). Im view of this language, pur- LURES RRR LER ERATE IN DRONE ING — pose, and rule of construction, the priority asserted here by the United States appears to be securely es- tablished.’’ United States v. Emory, supra at 426. See also Small Business Administration v. McClellan, 364 U.S. 446 (1960). Both of these cases hold that only ‘‘the plainest inconsistency’? would warrant an implied excep- tion to § 3466. The United States Supreme Court in its latest inter- pretation of the application of § 3466 to a Chapter X proceeding started with the Emory case: “Thus, on the face of the statute, no inconsistency arises from applying both § 3466 and 4 199 to Chapter X proceedings, much les; the ‘plain inconsistency’ required if respondent is to prevail under the test of United States v. Emory, supra. That in itself strongly suggests that $3466 should apply here, and our ex- amination of the background and legislative history of $199 and of Chapter X generally does not reveal a contrary intent on the part of Congress. ‘‘Before the reorganization legislation of the 1930’s, the principal method of reorganizing corporations that were unable to meet their debts was the equity re- ceivership. This judge-made device was designed to preserve the debtor business as a going concern by cancelling claims against it, in return for which can- cellation the claimants received debt or equity inter- ests in a new corporation, which then acquired the assets of the old corporation in a judicial sale. See T. Finletter, The Law of Bankruptcy Reorganization 1-17 (1939). By 1926, it was established that § 3466 applied to give the United States an absolute priority for payment of debts due it from insolvent corpora- tions in equity receivership. Price v. United States, 269 U. S., at 502-503, and see Blair, The Priority of _ — the United States in Equity Receiverships, 39 Harv. L. Rev. 1 (1925). ‘In 1933, Congress enacted 477 of the Bankruptcy Act, 47 Stat. 1474, providing a statutory procedure for the reorganization of railroads. Section 77, as well as later corporate reorganization statutes dis- eussed below, was designed to follow the general format of the equity receivership. As one of the early commentators on the federal statutes has noted, ‘{t]he principles of the equity receivership underlie nearly every substantive provision of the [reorganiza- tion acts].’ Finletter, supra, at 3. These statutes were not, of course, mere codifications of the law governing equity receiverships. They were designed in part to correct abuses and inefficiencies that had existed under the prior regime. Duparquet Co. v. Evans, 297 U. S. 216, 218-219 (1936). However, the problems of the equity receivership that led to the legislative intervention did not include the Govern- ment’s priority under § 3466, a relatively uncontro- versial aspect of the receivership procedure. ‘‘Nothing in §77 casts any doubt on the continued priority of the United States under § 3466. Indeed, the only provision in the new statute affecting the claims of the United States was § 77(e), which pro- vided in pertinent part: ‘* «Tf the United States of America is directly a creditor or stockholder, the Secretary of the Treasury is hereby authorized to accept or re- ject a plan in respect of the interests or claims of the United States.’ 47 Stat. 1478. The purpose of this provision was to overcome the effect of two prior rulings of the Attorney General that the Secretary of the Treasury lacked authority to compromise claims of indebtedness owed to the — PR I SLO MLE IE I LEELA YIM MEET ET OS SITAR Ct ea EEL SEAS aR —* =. Government by the railroads, 33 Op. Atty. Gen. 423 (1923), 34 Op. Atty. Gen. 108 (1924).° “8 See Senate Committee on the Judiciary, Criticisms and Suggestions Relating to H. R. 14359 and S. 5551, Amending the Bankruptcy Act 19-20, 72d Cong., 2d Sess. (Comm. Print. 1933). ‘*In 1934, Congress enacted § 77B of the Bankruptcy Act, 48 Stat. 911, which provided a reorganization scheme for corporations generally, closely modeled on the railroad reorganization scheme of 477; §77B(e) (1) granted the Secretary of the Treasury power to compromise federal claims, in language almost identi- cal with that of §77(e). 48 Stat. 918. There is no language in the statute, and nothing in its history, to suggest any intention to alter the established prior- ity of the United States under § 3466. ‘In 1935, the Secretary of the Treasury called the attention of Congress to the fact that the courts were construing §77B(e)(1) to include the United States among the general creditors in reorganization pro- ceedings, so that plans disapproved by the Secretary for failure to satisfy a federal claim could nevertheless be confirmed if the necessary majority of general + ey creditors approved. S. Rep. No. 953, 74th Cong., 1st Sess. (1935). The Secretary proposed an amendment, which, after some weakening in the House, see S. Rep. No. 1386, 74th Cong., 1st Sess. (1935), was adopted. “® The Secretary had proposed that he be given a veto over plans that failed to provide for ‘payment’ of any fed- eral claim. See S. Rep. No. 953, supra. The House imposed the ‘payment’ requirement only upon tax and customs claims, possibly intending to leave the Government in the position of a general creditor with respect to other claims, ‘see S. Rep. No. 1386, supra, and this was the form in which the amend- ment was adopted. Section 199 preserves this apparent dis- tinction between tax and other claims, see text at n. 4, supra. However the courts, relying on the strong presumption against implied exceptions to § 3466, have not treated the Government as a general creditor in its nontax claims, but ———! so rather have held that it has priority under § 3466. United States v. Anderson, 334 F.2d 111 (C.A. 5th Cir. 1964); In re Cherry Valley Homes, Inc., 255 F. 2d 706 (C.A. 3d Cir. 1958) ; Reconstruction Finance Corp. v. Flynn, 175 F. 2d 761 (C. A. 2d Cir. 1949). “If as appears from the present case, § 3466, if applicable, may, in some instances, give the Government greater protec- tion than § 199, it would be anomalous to deny that protec- tion to Government tax claims while granting it to nontax claims, since Congress clearly intended that tax claims should have greater protection. 49 Stat. 966 (1935). In its relevant provisions, the amendment was identical with present § 199, and the 1938 revisions which culminated in the replacement of §77B by present Chapter X did not affect it. ‘Thus § 199 is derived from an enactment designed to grant the Government the power to compromise its claims against debtors, and an amendment designed to ensure priority for federal claims over the claims of general creditors. Nothing in this background lends any support to respondent’s claim that the draftsmen of Chapter X meant to provide an exception to the operation of § 3466 for reorganization proceed- ings under the new statute. Indeed the established practice of applying § 3466 to equity receiverships, the acknowledged predecessor of the Chapter X pro- ceeding, combined with the failure to indicate in any way an intent to alter that practice in the new stat- utes, supports the conclusion that Congress affirma- tively meant § 3466 to apply to statutory reorganiza- tion.° “10 The leading authorities agree that § 3466 applies to Chapter X proceedings. Finletter, supra, at 388-393; 6A Collier on Bankruptcy 269 n. 11 (14th ed. 1969). ‘‘As we noted at the outset, § 3466 must apply according to its terms except where expressly super- seded, or where excluded by a later enactment ‘plainly inconsistent’ with it. Here the statute literally applies, and no plain inconsistency with the scheme of ee CRITE NEE PELE LILLE ISIN EEO TRIED ISS — A-10— Chapter X appears. The terms of § 3466 are clearly not satisfied by the reorganization plan here in ques- | tion, which provides payment in part to general creditors and other nonpreferred claimants" before “11 This case does not raise the question, never decided by this Court, whether § 3466 grants the Government priority over the prior specific liens of secured creditors. See United States v. Gilbert Associates, 345 U. S. 361, 365-366 (1953)” United States v. Emory, supra at 329-33. (Emphasis added.) (Footnotes in quotation. ) satisfaction of the federal tax claim. Therefore the judgment upholding the plan must be reversed, and the case remanded to the Court of Appeals for further proceedings consistent with this opinion.”’’ The interpretative instructions of the Supreme Court underlined above, as well as the dictum referring squarely to section 77 proceedings, seem clearly to require the application of § 3466 to the instant case. The most difficult problems of statutory interpretation pertaining to this issue, however, concern specific statu- tory language establishing or dealing with priorities which “may be argued to conflict with 4 3466. There is language in some cases which says that § 3466 ‘‘does not apply in bankruptcy’’ cases. United States v. First National Bank & Trust of Fargo, 386 F.2d 646, 648 (8th Cir. 1968) ; Adams v. O’Malley, 182 F.2d 925 (8th Cir. 1950); In Re Taylor Craft Aviation Corp., 168 F.2d 808, 810 (6th Cir. 1948). Such language must be limited to the facts of the issues decided in the cases. It is clear, for example, that section 64(a) of the Bankruptcy Act does apply in con- ventional bankruptcies and is clearly inconsistent withthe absolute priority of § 3466. This, of course, might lead to the conclusion that § 3466 was not applicable to con- ventional bankruptcies (as stated by the courts above) except for its possible incorporation as a fifth priority under § 64(a) (5). ww When the Supreme Court in Davis v. Pringle, 268 U.S. 315 (1925), held that the United States was not ‘‘a per- son’? within the meaning of 4 3466 and that hence 4 3466 was not incorporated into the fifth priority accorded by §64(a)(5), Congress promptly amended §64(a)(5) to make explicit its intention that § 3466 should apply. See the Chandler Act, June 23; 1938, 52 Stat. 874, amending 64(a)(5) of the Bankruptcy Act. — It appears clear, however, that 4 64(a) does not apply to the chapters of the National Bankruptcy Act which do not deal with conventional bankruptcies, absent specific reference thereto. See 11 U.S.C. § 502 (1970), which gen- erally applies the provisions of Chapters I to VII in Chapter X proceedings and then specifically excludes §64(a) (11 U.S.C. §104 (1970)) and 11 U.S.C. § 1059 (1970) which specifically applies § 64(a) to Chapter XIII proceedings. We conclude that Congress is thoroughly familiar with § 64(a) (as well as § 3466) and if it had in- tended it to apply to Chapter VIII dealing with railroad reorganizations, it would have said so. Another somewhat difficult argument may be made con- cerning the following language included in Chapter VIII, 11 U.S.C. § 205(e) (1970): ‘‘Provided further, That if, in any reorganization proceeding under this section, the United States is a creditor on claims for taxes or customs duties (whether or not the United States has any other in- terest in, or claim against, the debtor, as creditor or stockholder), no plan which does not provide for the payment thereof shall be confirmed by the judge ex- cept upon the acceptance, certified to the court, of a lesser amount by the President of the United States or the officer or agency designated by him pursuant to the provisions of the preceding paragraph hereof :”’ Be iititeeeeeeeeeeeeeeeeee ee net tee ADEE COR RIG Ohm Hk SE NMI a —_—s This provision, however, does no more than provide a very stringent method for compromise of federal tax or cus- toms claims and as we see the matter, cannot appropri- ately be viewed as ‘‘plainly inconsistent’’ with the basic priority established by § 3466. We note legislative his- tory language which can be argued to the contrary of this conclusion. Senate Rept. No. 1985, 74th Cong. 2d Sess. (1936) ; H.R. Rep. No. 2926, 74th Cong. 2d Sess. 6 (1936), In this regard, however, we find the actual language em- ployed in the statute utterly inadequate to express any exclusion of § 3466. Further, in United States v. Key, 397 U.S. 322 (1969), dealing with a similar argument concerning similar language incorporated in Chapter X § 199, the Supreme Court said: ‘In approaching a claim of an implied exception to § 3466, we start with the principle, noted above, that the statute must be given a liberal construction con- sonant with the public policy underlying it. Applying that principle to an earlier claim that a statutory scheme implicitly excluded § 3466, this Court held that ‘[o]nly the plainest inconsistency would warrant our finding an implied exception to the operation of so clear a command as that of § 3466.’ United States v. Emory, 314 U. S. 423, 433 (1941). ‘*Here the Court of Appeals discerned an intent not to apply § 3466 to Chapter X proceedings from § 199 of the Bankruptcy Act, which forbids the approval of any reorganization plan which does not provide for the ‘payment’ of taxes or customs due to the United States, unless the Secretary of the Treasury accepts ‘a lesser amount.’’’ United States v. Key, supra at 324-25. (Footnote omitted.) After reciting other claimed bases for excluding appli- cation of § 3466 to Chapter X proceedings, the Court con- cluded : | — A-13 — ‘*In our view these provisions are not logically in- consistent with the terms of § 3466, nor would they be rendered redundant if the older statute applied, nor does their language or legislative history reveal a purpose incongruous with its application.’’ United States v. Key, supra at 326. Again as to this issue, we feel that United States v. Key, supra, controls decision of our present case. If there be, as appellees argue, overriding policy and equita- ble considerations which cry for a different result, those contentions must be made before Congress for specific statutory amendments. See Plumb, The Federal Priority in Insolvency: Proposals for Reform, 70 Micu. L. Rev. 1 (Nov. 1971) page 3. As to appellee’s Koppers Company, Inc., and the various city and county claimants for taxes, we note that these claims are founded primarily upon liens authorized by state statutes. It is, however, clear to us that federal and not state law controls both in determining priority and in determining whether the lien relied upon is ‘‘choate’’ or ‘‘inchoate.’’ None of the liens relied upon in this record were the subject of proceedings” designed to divest the debtor of either title or possession of its property prior to bankruptcy. See United States v. Gilbert Associates, Inc., 345 U.S. 361 (1953); Gordon v. Campbell, 329 U.S. 362 (1946). In Gilbert the Supreme Court said: ‘‘In claims of this type, ‘specificity’ requires that the lien be attached to certain property by reducing it to possession, on the theory that the United States has no claim against property no longer in the pos- session of the debtor. Thelusson v. Smith, 2 Wheat. 396. Until such possession, it remains a general lien. There is no ground for the contention here that the Town had perfected its lien by reducing the property ERE TEE NE LIL A LEDGE LIEN IN FETE NAN ENON GE Tat ea TNE aN AS NSS Se ntsc —£-M< a to possession. The record reveals no such action. The mere attachment of the Town’s lien before the recording of the federal lien does not, contrary to the holding of the Supreme Court of New Hampshire, give the Town priority over the United States. The taxpayer had not been divested by the Town of either title or possession. The Town, therefore, had only a general unperfected lien. United States v. Waddill Co., supra; Illinois v. Campbell, 329 U.S. 362, 370. Where the lien of the Town and that of the Federal Government are both general, and the taxpayer is in- solvent, § 3466 clearly awards priority to the United States. United States v. Texas, 314 U. S. 480, 488.” United States v. Gilbert, supra at 366. The liens of appellees herein are not ‘‘specific and per- fected liens.’’ United States v. Waddill, Holland & Flinn, Inc., 323 U.S. 353 (1945). They are general liens under federal law and 43466 ‘‘clearly awards priority to the United States.’’ United States v. Gilbert, supra at 366. See also Illinois ex rel. Gordun v. Campbell, 329 U.S. 362 (1946) ; United States v. Texas, 314 U.S. 480 (1941). Since we believe that 4 3466 and the recent interpreta- tion of it in United States v. Key, supra, control this case, we have no occasion to analyze the government’s other contentions to the effect that its claims are entitled to priority because there was no diversion of income such as to occasion application of the six months rule and that its claims were both secured claims and first in time. We also note but reject appellees’ assertion that we should find a controlling distinction between this case and the Key case in the fact that these debts to the United States are secured obliga‘ions arising from Reconstruc- tion Finance Corporation loans, whereas the debts in Key were for federal taxes. T —_Y = Federal claims which are secured by mortgage or lien are nonetheless ‘‘debts’’ within the meaning of § 3466 and hence entitled to priority thereunder. Small Business Administration v. McClellan, 364 U.S. 446 (1960); W. T. Jones & Co. v. Foodco Realty, Inc., 318 F.2d 881 (4th Cir. 1963). Further, although the application of 4 3466 was orig- inally excluded by the statute creating the Reconstruction Finance Corporation (15 U.S.C., § 603 (1970)), the R.F.C. was abolished in 1957 and its loans were transferred to the Secretary of the Treasury. The exclusion clause itself was repealed in 1966 by recodification of Title 5. Pub.L. 89- 554, § 8(a), Sept. 6, 1966, 80 Stat. 648, 654, 655. The judgment of the District Court is vacated and this ease is remanded for further proceedings in accordance with this opinion. — A-16— Dissenting Opinion of Judge Paul C. Weick Entered April 4, 1972 Weick, Circuit Judge, Dissenting. This case is im- portant to over $1,200,000 of creditors in railroad reor- ganization proceedings under Section 77 of the Bankruptcy Act, creditors whose priority claims were subordinated to the claim of the United States by the Court’s opinion which reversed a judgment of the District Court' to the contrary. The case involves construction of the priority provisions of the Act, of the Reconstruction Finance Cor- poration Act as amended,? the applicability of R.S. § 3466, and the effect of the abolishment of R.F.C. and tiie repeal of statutes creating it. Without question, the priority claims of the creditors were superior to the loan of R.F.C. which was secured by pledge of an issue of First Mortgage 4% Bonds. The United States claimed, however, and the Court held, that because of the abolishment of R.F.C. and repeal of the statutes many years after the loan was made, the Govern- ment need not look to the lien of its mortgage bonds, but could claim priority under R.S. § 3466, which the Recon- struction Finance Corporation Act, as amended, (and prior to its repeal) provided was inapplicable. The Court’s opinion is based entirely on dicta in United States v. Key, 397 U.S. 322 (1970); but Key involved a different type of proceeding, namely, a corporate reor- ganization under Chapter X of the Bankruptcy Act, rather than a railroad reorganization proceeding under Section 77, such as was involved in the present case. Counsel even question the validity of the dicta, pointing out that the 1 316 F.Supp. 1103 (M.D. Tenn. 1970). 215 USC. § 603. - —A-17— court on page 330 quoted Section 77(e), as it existed prior to the Act’s amendment in 1935, when the statute was re- written entirely and drastically changed. There is nothing in the Court’s opinion to indicate that it considered amended section 77. Furthermore, Key involved a tax claim of the United States. Our case, unlike Key, involved a loan made by R.F.C. to the railroad, which loan was secured by a pledge of $6,216,000 of First Mortgage 4% Bonds. At the time the railroad went into reorganization it owed the Govern- ment on the loan $4,571,000 in principal, and $461,731.13 in interest. The statute creating R.F.C. granted it power to sue and to be sued, and expressly provided: ‘‘Debts due the Corporation, whether heretofore or hereafter arising shall not be entitled to priority available to the United States pursuant to section 191 of Title 31 (R.S. 3466)...” In Reconstruction Finance Corp. v. Menihan, 312 US. 81 (1941), the Court refused to treat RFC as the United States, holding that costs could be assessed against it the same as against any other litigant. RFC, however, was abolished in 1957 pursuant to provi- sions of the 1949 Reorganization Act (Ch. 226, p. 209) and Reorganization Plan No. 1 of 1957 (22 F.R. 4633, 71 Stat. 647), and its assets were transferred to the Secretary of the Treasury. See also 15 U.S.C.A. 601 and 603 notes. It was not until nine years later that Congress enacted the Omnibus Reorganization Act repealing hundreds of obsolete statutes, only part of which related to the RFC. We are asked to infer therefrom that Congress intended to restore priority of the United States, thereby displac- ing the lien of existing mortgage indebtedness of RFC, to —— — A-18— the prejudice of priority creditors. It is not believed that Congress intended to do any such thing. In my opinion, to grant the United States priority would conflict with two decisions of the Supreme Court which held that claims of the Government for money loaned to railroads during federal control, were not entitled to priority. United States v. Guaranty Trust Co., 280 U.S. 478 (1930), and Mellon v. Michigan Trust Co., 271 U.S. 236 (1926). The purpose of the RFC loans to railroads was to keep the railroads in operation, to rehabilitate them, and to preserve the existing transportation system. It was a public purpose. This was also the purpose of the Railroad Reorganization Act (Section 77). The statute creating RFC provided specific means to insure repayment of loans other than the priority provision of § 3466. These means were strictly followed in the present case by a pledge of First Mortgage 4% Bonds to secure the loan. While there was no express provision in the federal control statutes excluding indebtedness to the Govern- ment from the operation of 43466, the Court held in United States v. Guaranty Trust Co., supra (280 U.S. 478), that Congress intended such exclusion. The Court said: “Moreover, Congress evidenced unmistakably its purpose to rely, for obtaining payment of the Govern- ment’s advances, upon means other than the priority provided for by 4 3466. Under all of the sections, the giving of adequate security was either required or left to the discretion of the President. Under § 210 no advance could be made, unless the Interstate Com- merce Commission was satisfied that the earning power of the carrier and the security given furnished reasonable assurance that the loan would be repaid and all obligations in connection therewith would be performed. The interest rate required is much greater — A-19 — than that which ordinarily accompanies even a busi- ness loan carrying such assurance of repayment as would have resulted from an application of the priority rule. Thus, both the general purposes of Title II and its specific provisions make it clear that Congress intended to exclude the indebtedness so aris- ing from the scope of § 3466 of the Revised Statutes, just as under the Federal Control Act it had excluded therefrom claims incident to current operation of the railroads. Mellon v. Michigan Trust Co., 271 U.S. 236, 240.” (Id. at 485-486). It is clear that railroads cannot operate without credit. The credit is necessary to obtain labor, materials and interline accommodations with other railroads; without such credit operations would cease. If further appears from the record that RFC, as well as the Secretary of the Treasury, permitted the railroad to operate when they both knew that in so doing the rail- road was incurring debts and losing substantial sums of money. By the continuous operation the mortgage security of the Government was preserved, and the trustee in the reorganization proceeding was enabled to sell the railroad as a going concern and without interruption of service to the public. The Government here was entitled to treat- ment no different than that accorded to any other secured creditor. Equitable principles which are applied in creating priority liens of creditors under Section 205 for credit furnished within a period of six months prior to the re- organization proceeding, should be adhered to. Southern Ry. v. Carnegie Steel Co., 176 U.S. 257 (1900); Burnham v. Bowen, 111 U.S. 776 (1884) ; Miltenberger v. Logansport Ry., 106 U.S. 286, 311 (1881) ; Southern Ry. v. Flourney, 301 F.2d 847 (4th Cir. 1962). _1.20— = Reliance upon cases such as United States v. Emory, 314 U.S. 423 (1941) and Small Business Adm’nv. Mc- Clellan, 364 U.S. 446 (1960), involving commercial loans to private individuals, is misplaced. There was no statute involved in these cases which excluded the operation of § 3466, or facts from which an intent on the part of Con- gress to exclude operation of § 3466 could possibly be in- ferred. Nor was there involved in these cases a comprehensive scheme of Congress, as is evidenced by the Railroad Re organization Act, to keep railroads in operation and to provide means for their rehabilitation which could be frustrated if the railroad’s ability to obtain credit from private sources is impaired. Substantial questions are presented in the appeal, and I respect the views of my colleagues. I would grant the rehearing and determine priorities excluding the opera- tion of 4 3466. -_-_ — A-21— APPENDIX C In the District Court of the United States For the Middle District of Tennessee Nashville Division In the Matter of: In Proceedings for . the Reorganization ag Central Railway aad of a Rai + Debtor. No. BK 67-2263 OPINION (Entered August 19, 1970) On September 22, 1969, the Trustee of the Tennessee Cen- tral 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 Rail- way 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 Cen- tral: 1. The United States Government, holder of the Ten- nessee Central’s first mortgage bonds, secured by an indenture of mortgage. 2. Various railroads and other related companies claiming recovery for interline balances accruing within the period of six months before filing of the reorganization petition. <= 3. Municipalities and counties, claiming recovery for back taxes for periods prior to the filing of the re- organization petition. 4. Suppliers of cross-ties and diesel fuel to the Ten- nessee Central during the six months before the filing of the reorganization petition. 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 set- tled. 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. It may be helpful at this point to quote from a general analysis of Section 77 contained in 5 Col- lier on Bankruptcy (14th Ed.), 77.02: Stated briefly, §77 has for its main purpose ‘‘the re- habilitation of the debtor by a readjustment of its fi- nancial 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 credi- tors that the fixed charges shall be brought within the probable future earnings available for the payment _— my 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 gen- eral 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 oper- ation 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 main- tenance 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 “[w]henever 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 provi- sion is inapplicable in conventional bankruptcy proceed- ings. 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 EO RELIED ot CRGEU RS sialon a. . & 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 77b of the National Bank- ruptecy Act, 11 U.S.C. § 205(b). Specifically, the last para- graph of section 205(b) provides in part: For all purposes of this section unsecured claims, which would have been entitled to priority if a re- | ceiver 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 in- tegrated 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 (1925) (claim under 31 U.S.C. § 191 not due priority in bankruptcy by integra- tion with section 64 of the Act). 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” —s 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 proceed- ing 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 as 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 Tennes- see 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 priority by virtue of — A-26 — ; debts owed to the RFC. Inasmuch as 31 U.S.C. $191 is inapplicable to bankruptcy proceedings, however, the re- sult is still the same, and the Court can only speculate as to why the Congress would repeal the statute and enable the United States to have a debt priority in other cases that it had not enjoyed for thirty years. The United States next contends that if its claim under 31 U.S.C. $191 is denied, it is still entitled to be paid ahead of all other claimants by virtue of the mortgage lien which it has upon the property of the Tennessee Central. In opposition, the carriers answer that their claim is an equitable one, cognizable under the so-called ‘‘six-months creditors’’ rule, and should therefore come ahead of any claims which the United States might advance. The six-months rule is a creature of equity. It was de- veloped in railroad equity receiverships in the late 19th Century, and was designed to guarantee the payment of funds to certain creditors to whom the railroad in receiver- ship had become indebted during the six months prior to the inception of the receivership. As the United States notes in its trial brief, ‘‘many inconsistencies exist among the lower courts’ decisions in dealing with the rule.’’ There is no cut-and-dried ‘‘six-months rule.’’ The Su preme Court has stated: It is apparent from an examination of the above cases [dealing with the six-months rule] that the decision in each one depended on its special facts. This court has uniformly refrained from laying down any rule _ as absolutely controlling in every case. . . . Southern R. v. Carnegie Steel Co., 176 U.S. 257, at 284-285 (1900). One oft-quoted formulation of grounds for application of the rule appears in Guaranty Trust Company of New York v. Albia Coal Company, 36 F.2d 34, at 35 (8th Cir. 1929): — A-27 — (1) That the consideration for the claim was a cur- rent expense of ordinary operation of the railroad, necessarily incurred to keep it a going concern. (2) That the claim represents a debt contracted with the expectation or intention of the parties that it was to be paid out of the current earnings of the rail- road. i (3) That the claim shall have accrued within six months prior to the appointment of the receiver. In considering application of the six-months rule, it must be noted that the special facts of the Tennessee Central case make it unique, and not altogether analogous to other railroad reorganization proceedings. For some time prior to the filing of the reorganization petition the Tennessee Central had been in serious financial difficulties. The rail- road showed operating losses in 1964, 1965, 1966, and 1967. Shortly before the railroad entered reorganization, it ap- peared to officers and directors of the Tennessee Central that it would be possible to obtain outside financial help to put the road on a sound footing once again, and enable it to pay off its quite considerable debt to the United States. Of particular interest is the help the Debtor received in handling its interline freight balances. The interline freight balances for which the carriers assert priority un- der the six-months rule are not a portion of the Debtor’s income which is owed the carriers for services rendered, but are rather funds which the Debtor collected for other carriers shipping over its lines, and are held by the debtor only as a type of collection agent for the carriers. According to affidavits submitted by the various car- riers, officials of the Tennessee Central contacted the car- riers and asked that the railroad’s interline accounts not be placed on a ‘‘pre-paid’’ basis until the road filed its lies RPL GRE LEE CONE GE ESET IELTS COIL AS LTE _ petition in reorganization. Operating on a ‘‘pre-paid” basis requires a greater degree of liquidity than financ- ing on the ‘‘collect’’ basis. When freight is shipped over two or more railroads on a ‘‘pre-paid’’ basis, the shipper is required to pay at the point of origin all charges due any railroad which will handle the shipment. The usual method of handling rail freight, payment on the ‘‘collect”’ basis, allows the carrier at the point of destination to col- lect all charges. On the following month the railroads de- termine the net amount due from one road to another, and payment is made. Robert H. Smith, treasurer of the Southern Railway Company, states in his affidavit: Money that is collected for another road is not treated as freight revenue (income) by the collecting road On the other hand, it is not segregated and placed in a separate account, but is mingled with and used as working capital of the collecting road. ... Any change in the usual practice by the railroad is likely to dis- rupt normal business relationships and cause serious inconvenience and expense to shippers and consignees. It is clear that the Tennessee Central would have been placed in serious financial difficulties if all shipments which it handled were placed on a ‘‘pre-paid’’ basis by other carriers. If the Tennessee Central had been forced to shut down its operations completely, it is a fair inference from this record that it would not have been possible for the trustee in reorganization to effectuate the sale of almost all of the road’s line to the other three carriers which now oper- ate it except possibly at a much reduced sales price. Once shippers had been forced to use means of transportation other than the railroad, they would have been reluctant to return to the railroad) As this Court has stated previ- ously, the primary purpose of the Railroad Reorganization — Act is to keep existing railroad lines in operation when- ever possible. See In re Tennessee Central Railway Com- pany, Debtor, supra. Two cases decided within the last ten years are ad- vanced by the parties hereto as instructive on the issues presented here in deciding priorities among the various claimants. These are Southern Railway Company v. Flournoy, 301 F.2d 847 (4th Cir. 1962) and In re New York, New Haven & Hartford Railroad Company, 405 F.2d 50 (2d Cir. 1968), cert. denied, 394 U. S. 999. The United States cites the New Haven case in support of its priority, while the carriers place great reliance on the Flournoy opinion, and attempt to distinguish it from New Haven. The two cases are generally concerned with the competing priorities, in railroad reorganization proceedings, of six- months creditors and secured claimants, such as mort- gagees and bond holders. a In the New Haven case, several unsecured creditors filed claims for services, parts and supplies, and sought a pri- ority in payment under the six-months rule. The Court stated : Whether the six months creditors receive priority de- pends, however, on whether there existed a ‘‘current debt fund’’ or ‘‘current expense fund’? from which payment could have been made but was used instead for the benefit of the bondholders. The reasoning be- hind the requirement of the current expense fund is that the six months claims deserve priority only to the extent that the claimants relied in extending credit on the availability of current income and not, along with others, on the railroad’s general credit standing. In re New York, New Haven and Hartford Railroad Company, supra, at 52. The reasoning is that six-months creditors should be al- lowed a priority only to the extent that there existed a — s-30— = fund available for their payment which was diverted to the benefit of other creditors. This rule was stated earlier by the District Court in the New Haven case in terms of providing a remedy to the six-months claimants when funds were improperly paid out on the mortgage debt before payment was made to current creditors whose extension of credit made con- tinued operation of the road a possibility and thus bene- fited the mortgagees. The Court stated: Revenues accruing from operations should be paid first to the operations creditors whose materials and services made those revenues possible; and only after all such operational claims have been paid, should the balance be available for the benefit of the mortgagees. If any operating revenues do improperly get into the hands of the mortgagees, equity requires that those revenues be restored to the operations creditors by the mortgagees yielding them a priority. In re New York, New Haven & Hartford Railroad Co., 278 F. Supp. 592, 597-98 (D. Conn. 1967). In the Flournoy case the Court ordered that a priority be given to the payment of interline balances, saying: Interline charges are, of course, contained in current revenues ... Such transportation is art and part [sic] of our national railroad system. Indeed, it is com- pelled by statute. 49 U.S.C.A. $1, et seq. With the District Court we agree that interline ac- . counts are an equitable lien on the railroad properties and outrank the mortgages. Southern Railway Com- pany v. Flournoy, supra, at 854. The Fourth Circuit justified the payment of the interline traffic balances on the theory that if such accounts had not been paid, the other lines would have demanded pay- - —_—v ment, by placing the line on a “‘pre-paid’’ basis, thereby threatening the railroad’s financial condition. Neither the New Haven nor the Flournoy opinion seems to include a consideration of the true nature of these in- terline balances. The money collected by the Tennessee Central could not reasonably be considered a portion of its ‘operating revenues.’’ The funds were not payment for any service rendered, or any goods sold, but monies rightfully due the carriers seeking priority. It is payment from shippers for haulage over the lines of these rail- roads which extended credit to the Tennessee Central. There is no argument, however, that the Tennessee Cen- tral held these funds in trust for the other carriers. In In re the Central Railroad Company of New Jersey, 273 F. Supp. 282 (D. N.J. 1967), aff’d per curiam, 392 F.2d 589 (3rd Cir. 1968), the Court stated, regarding the nature of interline freight balances: That they [the interline freight balances] are not trust funds is clear. The relationship among the sev- erai carriers engaged in an interline freight move- ment is that of debtor and creditor. The AAR [Amer- ican Association of Railroads] rules create no other relationship . . . While the interline freight balances are not trust funds, they may be entitled to prefer- ential treatment under the so-called six-months rule, provided there is a compliance with the requirements thereof. See Southern Railway Company v. Flournoy, 301 F.2d 847 (4th Cir. 1962). [Some citations omit- ted.] In re The Central Railway Company, 273 F. Supp. at 288-89. Thus, although the funds are not held in trust, the car- riers can be said to have an equitable right to a priority in their recovery, if all other requisite requirements are met. — A-32 — There is confusion among the parties seeking priority over the United States as to whether the six-months rule, or another rule, ‘‘the necessity of payment’’ rule, should be used to obtain the asserted priority. The Government resists assertion of either rule in behalf of other claim- ants. The rules differ only slightly in character. The necessity of payment rule was first enunciated in Milten- berger v. Logansport Railway Company, 106 U.S. 286 (1882), and is founded upon the theory that the payment of certain claims by the receiver or trustee may be neces- sary to the continued operation of the railroad, not, as in the six-months rule, that the payment is supported by equities in that they enabled continued operation, though perhaps not absolutely necessary. Mr. Justice Holmes stated in Gregg v. Metropolitan Trust Company, 197 US. 183, 187 (1905): ‘‘The ground of such allowance as was made [in Miltenberger] was not merely that the supplies were necessary for the preservation of the road, but that payment was necessary for the business of the road—a very different proposition.’’ In opposing application of the six-months rule, the United States contends that, under the rule, there must have been some diversion of funds from the operating revenues to the benefit of the mortgagees before the mort- gaged corpus of the railroad can be charged with debts due the six-months creditors. This proposition was first set out in Fosdick v. Schall, 99 U.S. 235 (1878), and was recently restated in In re New York, New Haven and Hartford Ry. Co., supra. The Supreme Court noted in Southern Ry. Co. v. Carnegie Steel Co., 176 U.S. 257, 285 (1900): ‘‘[W]hen current earnings are used for the bene- fit of mortgage creditors before current expenses are paid, the mortgage security is chargeable in equity with the restoration of any funds thus improperly diverted from their primary use.’’? Many courts, however, have taken the view that it is not necessary to show any diversion of a= A.33 income, especially where it can be amply demonstrated that the railroad has derived some benefit from the serv- ices rendered by the creditors claiming an equitable pri- ority. In Southern Ry. Co. v. Flournoy, supra, the Court stated: [W]e think income diversion to mortgage is not the sine qua non of corpus invasion where there are found —as special circumstances—all elements constituting the pre-eminent equity . . . Throughout them [cases discussing priorities and income diversion], however, runs the acknowledgment that, in special circum- stances .. ., the general creditor partakes of liened capital assets ahead of the mortgagee. Id., at 851. Two Sixth Circuit cases, both more than sixty years old, touch upon the subject of priorities in railroad bankruptcy proceedings. Gregg v. Mercantile Trust Co., 109 F. 220 (6th Cir. 1901); and Gregg v. Metropolitan Trust Co., 124 F. 721 (6th Cir. 1903), aff’d 197 U.S. 183 (1905). Neither case is concerned with what priority should be afforded to the payment of interline traffic balances, but the Court stated in the Mercantile Trust case, supra, at 229: It is plain that the payment of car-trust obligations by the railroad company enhanced the interest of the mortgagees in such equipment. To the extent that such prior obligations were paid off, the mortgagees were benefited. Debts incurred for the purpose of making additions to the permanent equipment and motive power of a mortgaged railroad are not current operating expenses for supplies or materials, and are not preferential debts. If such debts would not be preferential debts if unpaid, their payment out of a fund primarily applicable to such debts is a diversion which the bondholders must make good if they were thereby benefited. [Citations omitted]. —_—: = Thus, the Circuit Court was of the opinion, even then, that any expenditure which benefited the mortgagees was ipso facto a diversion, and payment thereof out of the mort- gaged corpus is proper. In the Metropolitan Trust case the Court of Appeals had established a claim for ties sold to a railroad in re- ceivership as a six-months claim, but held that the claim could not be paid from the fund held by the receiver. The Supreme Court affirmed, but, after finding that there had been no diversion of income to the benefit of mortgagees, stated the issue as ‘‘whether in such a case a claim for necessary supplies furnished within six months before the receiver was appointed, should be charged on the corpus of the fund.’’ 197 U.S. at 186. Finding ‘‘no special cir- cumstances’”’ or ‘‘equity’’ favoring the suppliers, the Court refused to charge the fund for the claims of suppliers ahead of the mortgagees. 197 U.S. at 186, 190. The Court thus seems to indicate that where there are special cir- cumstances or equities favoring six-months claims, even in the absence of a diversion of income to the benefit of secured creditors, such claims might be allowed a priority in the assets. The United States contends that the lack of any income for a lengthy period prior to the filing of the Tennessee Central’s reorganization petition should have put the car- riers on notice that there was no ‘‘current operating fund” from which these interline traffic balances could be paid. The carriers allege that their extension of credit, by han- dling the Debtor’s interline balances on a ‘‘collect”’ basis,—unique to the operation of railroads—enabled the Tennessee Central to continue in operation through diff- cult financial straits, preserving the railroad as a ‘‘going concern’’ and facilitating the continuation of rail service to the vast majority of the area previously served by the Tennessee Central. — — A-35 — The equities in this case favor the priority of the car- riers. Their extension of credit preserved the corpus of the mortgaged railroad by maintaining it as a ‘‘going concern,’’ and at the same time enabling the area formerly served by the Tennessee Central to enjoy continued rail service, thereby carrying out the expressed purposes of the railroad reorganization section of the National Bank- ruptey Act. Therefore, the Court concludes that the carriers claim- ing priority under the six-months rule for interline freight balances should be given a priority over the United States, holder of the Debtor’s bonds, and a mortgage on its property. Application of the six-months rule in this mat- ter follows the criteria set forth in the Flournoy case, supra, and others. The maintenance of service through the carriers’ extension of service was of benefit to the mort- gagee, and hence their balances should be paid just as if some physical diversion of monies from current revenues had been of benefit to the mortgagee. The United States is entitled to no statutory priority in this railroad reorganization action. Its claim is secured by the corpus of the mortgage, and it stands in this case as would any other bondholder or mortgagee. As the Court stated in In re Chicago Express, Inc., 222 F.Supp. 566 (S.D. N.Y. 1963); aff’d 332 F.2d 276 (2d Cir.) cert. denied 379 U.S. 879 (1964): ‘‘Where Congress intended that special priorities be granted, ‘it has carefully enu- merated them and any omissions must be construed as ex- press exclusions .. .’’’. [Citations omitted.] 222 F.Supp. at 571. Another group of claimants seeking priority under the six-months rule includes three firms which leased freight cars to the Tennessee Central. The statement by these firms that the Tennessee Central operated with only six or seven freight cars of its own, leasing the remainder, is = unchallenged by the United States. According to the brief of one of the leasing companies, the Tennessee Central was almost unique in this respect, in that it operated almost totally with leased cars. In its brief the United States says simply, ‘‘Finally items such as car rentals are not allowable,’’ citing Thomas v. Western Car Co., 149 U.S. 95 (1893), and In re Chi- cago and N.W. R. Co., 110 F.2d 425 (7th Cir. 1940). Louis O. Sloss, secretary-treasurer of the Chicago Freight Car Leasing Company, one of the leasing claim- ants, states in his affidavit that the firm allowed the Tennessee Central to continue the use of the cars for a six- month period prior to the filing of the petition in reor- ganization in reliance on the six-months priority rule. Sloss also stated that if Chicago Freight Car Leasing had recalled all the cars upon the cessation of payment, in July, 1967, the Tennessee Central would have been un- able to operate. In the Thomas case, supra, the Court disallowed the granting of priority to the car rental firm there involved, saying: ; [T]he principal officers of the car company were in control of the railroad company and its operations, and must be treated as having full notice of the fi- nancial condition of the railroad company, and as having leased the cars to it in reliance upon its gen- eral credit, rather than in expectation of displacing the priority of mortgage liens. Thomas v. Western - Car Co., supra, at 112. The Court also stated: The case of a corporation for the manufacture and sale of cars, dealing with a railroad company, whose road is subject to a mortgage securing outstanding bonds, is very different from . . . those who furnish, _—— — A-37 — from day to day, supplies necessary to the mainte- nance of the railroad. In the present case it appears, in the contract be- tween the car company and the railroad company, that the former reserved the express right to terminate the contract and demand possession of the cars forth- with upon any failure by the railroad company to promptly pay the interest or the principal of any of its bonds or other liabilities. 149 U.S. at 112. The Thomas case was, of course, decided long before the enactment of the railroad reorganization section of the National Bankruptcy Act, the purpose of that act being to keep existing railroads in operation. If, as the Court suggests in Thomas, the freight car leasing companies in this case had withdrawn their cars at the first sign of financial difficulties, the Tennessee Central would have been forced to suspend operations immediately. In the Chicago case, there is no showing that the Pull- man cars there in issue were necessary to the operation of the road. Also the controversy involved not the payment of actual rental for the cars, but the lighting and mileage charges on them. Moreover, the cases seem to draw a dis- tinction between ‘‘car rentals’’ and ‘‘materials and sup- plies.”’ See In re Chicago & N.W. R. Co., supra, at 431. In the case of the Tennessee Central, operating almost wholly with leased cars, the leasing of these cars should be treated as analogous to buying ‘‘materials and sup- plies.’’ In any case, the central point is whether the goods or services supplied by the creditor seeking priority under the six-months rule were necessary for the continuation of service on the debtor railroad. Without any doubt, the Tennessee Central could not have operated at all without the freight cars which it leased from the Chicago a SNL ap SMALLEY YONI AA AINE hea iS is SRY — A-38 — Freight Car Leasing Company, Trailer Train Company, and American Refrigeration Transit. Therefore, these companies are entitled to the same priority under the six-months rule as the carriers seeking recovery of inter- line freight balances. Several municipalities and counties along the line of the Tennessee Central have filed claims for taxes, and the interest and penalties thereon, for the years 1966 and 1967, The Court has already determined that the United States is entitled to no priority under 31 U.S.C. §191, and that the United States stands in the position of any bondholder and mortgagee in a similar case. It must now be determined whether these governmental] units are en- titled to recovery of the taxes against the corpus of the mortgage, whether these taxing units will be allowed to recover interest and/or penalties, and what priority should be given to such recovery, if granted. Tennessee law provides: The assessed taxes on all real estate, personalty, railroad, telegraph, and telephone, and other public service companies, and all damages and costs accruing thereon, shall be and remain a first lien upon such property, from the tenth of January of each and every year, for the taxes of that year. Tenn. Code Ann. §67-1801. - Tennessee law is applicable on this point, and therefore, taxes should be accorded first priority in recovery, ahead of the six months creditors, if it is determined that under the provisions of the National Bankruptcy Act, this Court has jurisdiction to approve the claim. The Supreme Court said in Gardner v. New Jersey, 329 U.S. 565 (1947): We think, contrary to the position of New Jersey, that the reorganization court has jurisdiction over —_ — A-39 — the proof and allowance of tax claims and that the exercise of that power was not a suit against the state. . . . We find not the slightest suggestion that Congress left out the large class of tax claims which recurringly appears in reorganizations and often as- sumes, as here, large proportions, 329 U.S. at 572-73. The National Bankruptcy Act contains a provision disal- lowing claims of states or other taxing units for penalty claims: Debts owing to the United States or any State or subdivision thereof as a penalty or forfeiture shall not be allowed, except for the amount of the pecuni- ary loss sustained by the act, transaction, or pro- ceeding out of which the penalty or forfeiture arose, with reasonable and actual costs occasioned, thereby and such interest as may have accrued thereon ac- cording to law. National Bankruptcy Act $57j, 11 U.S.C. §93(j). A portion of the railroad reorganization section of the bankruptcy act seems to apply section 57(j) to railroad cases: In proceedings under this section and consistent with the provisions thereof, the jurisdiction and powers of the court, the duties of the debtor and the rights and liabilities of creditors, and of all persons with respect to the debtor and its property, shall be the same as if a voluntary petition for adjudication had been filed and a decree of adjudication had been en- tered on the day when the debtor’s petition was filed. In a case involving the lengthy reorganization of the New York, New Haven & Hartford Railroad, the Court of Appeals for the Second Circuit held that the tax lia- bilities of a railroad which were incurred prior to the consummation of the reorganization plan would be paid as a cost of administration. See In re New York, New a EER ADAIR LS TSN ARON? + ae apie wroetiha ee Haven & Hartford R. Co., 147 F.2d 40, 52-53 (2d Cir. 1945). Another case holding that §57(j) of the Bank- ruptey Act applies to railroad reorganization proceedings is In re Denver & R. G. W. R. Co., 27 F.Supp. 983 (D. Colo, 1939). There is no question that the taxes owed the municipal- ities and counties filing timely claims in this matter should be paid by the Trustee. As for interest, the Supreme Court held recently in Nicholas v. United States, 384 U.S. 678 (1966), that interest should not be allowed in an ordinary bankruptcy proceeding in order to effectuate ‘‘the broad equitable principle that creditors should not be disadvantaged vis-a-vis one another by legal delays at- tributable solely to the time-consuming delays inherent in the administration of the bankruptcy laws.’’ Id., at 683. The Court further held that the Trustee in bankruptcy would be liable for the penalties incurred through the non-payment of taxes when such penalties were imposed ‘“solely because of the trustee’s failure to file timely re- turns for the taxes incurred. . . .’’ Id., at 695. In the instant case, no penalties have been incurred through any failure of the Trustee to file timely returns. All taxes which have fallen due subsequent to the filing of the petition in reorganization on December 14, 1967, have been paid. The penalties are for delinquent taxes which accrued prior to this date. Tennessee law grants these taxing units a ‘‘first lien’ on the property of the Tennessee Central. It is stated in 5 Collier on Bankruptcy (14th ed.) 77.21 that: ‘‘When- ever tax claims are accorded a priority, even under 31 U.S.C. § 191, they will not supersede valid liens, or the priorities accorded administrative and operating costs or claims under the six months rule.’’ Therefore, the munici- palities and counties should not be granted a priority over the six months claimants unless they possess a valid lien _ for their tax claims. The Court is of the opinion that the applicable Tennessee statute grants such a lien to these taxing units. Earlier, in Collier, id., it is noted: ‘‘ With respect to state taxes, many state statutes grant a priority for claims thereon, and this priority will be recognized by the court.’’ The statutory priority granted by § 67-801, T.C.A., governs in this case. Therefore, these counties and municipalities will be granted first priority in this re- covery, ahead of both the six-months claimants, and the United States, as mortgagee and bondholder. No payment will be allowed as to the penalities which have been at- tached to these delinquent taxes, since the penalties have been in no way connected with any delay on the part of the Trustee. Interest on these taxes will be allowed only to the extent that it accrued prior to December 14, 1967. To allow the payment of any interest which accrued sub- sequent to this date would be unfair to the other creditors. The Koppers Company has filed a claim in this action, claiming priority both under the six-months rule, and under Tenn. Code Ann. § 65-1021, which provides: No railroad company shall have power to give or create any mortgage or other kind of lien on its rail- way property in this state, which shall be valid and binding against judgments and decrees, and execu- tions therefrom, for timbers furnished and work and labor done on, or for damages done to persons and property in the operation of its railroad in this state. T.C.A. § 65-1021. Koppers sought recovery for approximately $120,000.00 worth of cross-ties furnished to the Tennessee Central. — A-41— Whether or not Koppers would be entitled to recover under the six-months rule, it seems clear that it is due a priority by virtue of the applicable Tennessee lien stat- ute. There is no need for the Court to reach the question of recovery under the six-months rule, since Koppers will a ae , . CLIO Ne ene D SNPS Se Te eee ee ee SE ry —_ be allowed second priority in recovery against the corpus, following the taxing units, and preceding the six-months creditors. While it is true that Koppers did not at any time per- fect its statutory lien against the property of the Ten- nessee Central, the company states that the perfection of the lien was not carried out because of the injunction of this Court, holding all matters regarding the railroad’s financial status in abeyance pending disposition of the reorganization proceeding. It is not necessary for Koppers to have formally perfected its lien against the Debtor. The intent of the Tennessee statute is clear, and Koppers and its claim fall within the ambit of the law. The final claim which the Court must consider is that of the Humble Oil & Refining Company. Humble supplied the Tennessee Central with substantial amounts of diesel fuel during the six months preceding the filing of the re- organization petition, and asserts a priority under the six- months rule. Humble contends in its brief that this fuel was ‘‘material necessary for the continued operation of the railroad.’’ It is not clear that the extension of credit from Hum- ble was indispensable for the Tennessee Central to con- tinue in operation during the six months prior to reorgan- ization. For it is possible that some other fuel supplier might have extended this credit if Humble had refused to do so. Nevertheless Humble’s claim meets all of the cri- teria for application of the six-months rule as formulated in Guaranty Trust Co. v. Albia Coal Co., supra. Some fuel was certainly necessary to the continued operation of the road, and Humble was willing to supply it. The position of Humble is analogous to that of the freight car leasing companies. If the Debtor had been deprived of either freight cars, or a supply of diesel fuel at the first sign of financial difficulties, it would have been shut down almost immediately. —. — A-43 — The Court is of the opinion that Humble was, in this case, extending credit against current earnings within the contemplation of the six-months rule. Therefore, Humble is entitled to recover along with the other six months claimants. This case represents a lengthy and unique exercise in railroad reorganization. As was discussed in this Court’s opinion at 304 F.Supp. 789 (M.D. Tenn. 1969), the reorgan- ization of the Tennessee Central was accomplished not through a restructuring of the existing corporate shell, but through the sale of virtually all of the Debtor’s operating lines to other carriers, who have to this day continued service to all but a minute portion of the Tennessee Cen- tral’s former area of service. The Court’s exercise of jurisdiction in this matter is basically a matter of equity. The six-months rule is itself a creature of equity. The Court must look to the equities of the individual situation in order to arrive at a decision. The primary consideration in the application of the six- months rule, in light of the declared purpose of the re- organization act to keep railroads in operation, is whether the creditor claiming a priority under the rule was a vital factor in the continued operation of the road. In light of the expressed desire of Congress that rail- roads be kept in operation whenever possible, it must be assumed by the Court that it is more valuable to have the vast majority of the Tennessee Central trackage presently operated by other carriers, than to have the service dis- continued altogether. The creditors who have kept the railroad in operation have thus benefitted the mortgagee and bondholder, the United States, by preserving the service formerly provided by the Tennessee Central, thus enabling the trustee to sell the road as a going concern >... ST ay ee GE - we oa. ee Oe — A444 — and to realize a greater return that would have been the case if he had been forced to sell the physical properties of the road after it had closed down. A form of judgment will be submitted to accomplish these results. /s/ WILLIAM E. MILLER Cireuit Judge Sitting as District Judge by Designation _ ee _~w In the District Court of the United States for the Middle District of Tennessee Nashville Divisi Matter of: oe In Preseedings for the Re- Tennessee Central Railway organization of a Railroad Company, No. BK 67-2263 Debtor. Supplement to Opinion of August 19, 1970 Entered August 27, 1970 While this case was under advisement, the United States Supreme Court decided the case of United States v. Key, 397 U.S. 322 (1970). This case was not cited in any of the briefs before the Court, but was called to the attention of the Court by the attorney for the Trustee in the instant proceedings. Because the Court did not discuss the Key case in its opinion of August 19, 1970, this Supplement thereto is entered in the interest of completeness. In United States v. Key, supra, the Supreme Court held that Stat. 4 3466, 31 U.S.C.A. 4191, a provision giving a first priority to debts owed to the United States by an in- solvent debtor, is applicable to tax claims of the Govern- ment in corporate reorganization proceedings under Chap- ter X of the National Bankruptcy Act, 11 U.S.C. §§ 501-676. In discussing the history of the reorganiza- tion provisions of the Act, Mr. Justice Marshall stated, in part: Section 77 [relating to railroad reorganizations] .. . was designed to follow the general format of the equity receivership. . . . However, the problems of the equity receivership that led to the legislative inter- vention did not include the Government’s priority oe under § 3466, a relatively uncontroversial aspect of the receivership procedure. Nothing in 477 casts any doubt on the continued priority of the United States under § 3466. 397 US. at 330. The opinion goes on to reason that the corporate reor- ganization provisions, later enacted by Congress and modeled closely after the railroad reorganization provi- sions, contain no provision indicating that Stat. § 3466 should not apply in Chapter X reorganizations. It is the Court’s opinion that the language in the Key ease relating to the applicability of Stat. § 3466 to rail- road reorganization proceedings is clearly dictum because the issue before the Supreme Court in Key was the ap plicability of Stat. § 3466 to Chapter X proceedings, and the reference to its applicability to railroad reorganiza- tions was merely incidental to the decision on that one issue. Therefore, the Key case does not constitute preced- ent for allowing the Government’s claim for a first priority in the assets of the Tennessee Central in the in- stant proceeding. WM. E. MILLER Cireuit Judge Sitting as District Judge by Designation — A-47 — APPENDIX D Received for Entry, 11:00 A.M. October 9, 1970 Brandon Lewis, Clerk By: Guy W. Cooper, D.C. In the United States District Court for the Middle District of Tennessee Nashville Division ) In Proceedings for In the Matter of on nk latin Tennessee Central Railway Com- ¢ of a Railroad. pay, Sevier. No. BK 67-2263 JUDGMENT No. 94 Dividing Creditors and Stockholders Into Classes Accord- ing to the Nature of Their Claims, Setting Up Classi- fications of Creditors and Stockholders, Determining the Order of Priority of Claims and Directing Report by Trustee. A. Battle Rodes, Trustee of Tennessee Central Railway Company, the above named Debtor, having petitioned the Court for a hearing on the division of creditors and stock- holders into classes according to the nature of their claims and interests and for a determination of the order of priority of such claims, and a hearing on these issues having been held on November 10, 1969, after notice to all parties in interest, at which hearing United States of America, various railway companies claiming priorities, other creditors claiming priorities, and several counties and municipalities were represented by counsel, affidavits Od ga Sa were presented, arguments of counsel were heard and briefs were filed within the time allowed by the Court for the filing of briefs, and all parties were given opportunity to present evidence, to be heard, to file briefs, and no coun- sel having appeared on behalf of general creditors or on behalf of stockholders, and the Court having filed its memorandum opinion, including its findings of fact, con- clusions of law and order for judgment on August 19, 1970, with supplemental memorandum opinion on August 27, 1970; now, therefore, pursuant to said order for judg- ment; It Is Hereby Ordered and Adjudged that: 1. The classification of creditors and stockholders, the division of creditors and stockholders of the Debtor into classes according to the nature of their respective claims and stock interests, and the order of priority of such claims and interests be, and they hereby are, fixed as follows: (i) Expenses and costs of administration and operation of Tennessee Central Railway Company commencing De- cember 14, 1967, and costs and expenses incurred in this cause under orders of the Court; (ii) Claims for personal injuries to employees of Ten- nessee Central Railway Company, and claims of personal representatives of deceased employees of Tennessee Cen- tral Railway Company, arising under state or federal laws and accruing prior to December 14, 1967: (iii) Claims of counties and municipalities of the State of Tennessee for taxes assessed and unpaid on December 14, 1967, without penalty, but with interest thereon to the extent that interest had accrued prior to December 14, 1967 ; (iv) Claims for timbers furnished and work and labor done on, or for damages done to persons and property — 7 (other than injuries to employees) in the operation of Tennessee Central Railway Company in the State of Tennessee prior to December 14, fer, as provided under Section 65-1021, Tennessee Code Annotated; (v) Claims against Tennessee Central Railway Com- pany for interline freight balances in favor of other rail- way companies arising within six months prior to Decem- ber 14, 1967, claims against Tennessee Central Railway Company for amounts owing for car rentals or leasing of cars to Tennessee Central Railway Company accruing within six months prior to December 14, 1967, and claims for fuel supplied to Tennessee Central Railway Company for operation of the motive equipment of that company accruing within six months prior to December 14, 1967; (vi) Claims of United States of America for indebted- nesses due United States of America by Tennessee Cen- tral Railway Company represented by notes held by Treasury Department of United States of America, the payment of which is secured by the pledge of the First Mortgage Series A Bonds of Tennessee Central Railway Company ; z (vii) General claims against Tennessee Central Railway Company, including claims of general creditors and claims or interests (exclusive of stockholder interests) of what- ever character, other than those hereinabove enumerated; (viii) Claims of interest of preferred stockholders of Tennessee Central Railway Company; (ix) Claims of interest of common stockholders of Tennessee Central Railway Company. 2. A. Battle Rodes, Trustee, shall proceed with the classification of the specific claims filed and not objected to in the order of priority as hereinabove established, and shall report to the Court all outstanding and unsatis- fied claims and the amounts of such claims as shown upon the claims register and in the order of priority as herein- above stated. ee ‘ Be bah cic bai ne eee oe — =e 3. Upon the filing of such report by the Trustee, the Court by appropriate order will direct the distribution of copies thereof to the several parties in interest, will provide for the filing of objections to such report, and - will enter an appropriate order referring to Honorable Fred Elledge, Jr., Special Master, any objections to the amounts and priority classifications as set out in the Trustee’s report, for the taking of evidence thereon and reporting the Special Master’s findings and recommenda- tions to the Court. The report of the Trustee as provided for in this order shall remain open for amendment as to classifications, amounts and priorities of claims until the findings and recommendations of the Special Master on the items referred to him have been reported to, and acted upon by the Court. 4. The Special Master shall proceed with the hearing of objections heretofore filed to claims and now pending before him, and shall report to the Court his findings and recommendations thereon. 5. The Trustee on or before October 17th, 1970, shall cause a copy of this order and a copy of the following notice to be mailed to each of the mortgage trustees, creditors whose claims have not been withdrawn or set- tled and stockholders of the Debtor at their last known addresses as the same appear upon the books and records of the Debtor, or as may be known to the Trustee: — A-51 — Notice of Judgment Dividing Creditors and Stockholders Into Classes According to the Nature of Their Claims, Setting Up Classifications of Creditors and Stock- holders, Determining the Order of Priority of Claims and Directing Report by Trustee In the United States District Court for the Middle District of Tennessee Nashville Division In the Matter of In Proceedings for , the Reorganization Tennessee Central Railway Com- to Mailed. pany, Debtor. No. BK 67-2263 To All Mortgage Trustees, Creditors, Stockholders and Parties in Interest: Please take notice that on October 9, 1970, Honorable William E. Miller, Judge, U. S. Court of Appeals for the Sixth Circuit, acting as District Judge, entered the at- tached judgment in this case dividing creditors and stock- holders into classes according to the nature of their claims, setting up classifications of creditors and stock- holders, determining the order of priority of claims, and directing a report by the Trustee. Please take further notice that this judgment will be- come final as to the classifications and order of priorities of claims and interests of stockholders within the time provided by law in such cases following the date of the entry of the judgment. Please take further notice that the matter of individual claims, the amounts thereof, and the classification by priority into which an individual claim falls will be re- ported by the Trustee subject to objections by interested parties after the report has been filed. — A-52— Please take further notice that a copy of the report of the Trustee will be mailed to mortgage trustees, credi- tors and stockholders and other parties in interest when the report is filed. Dated at Nashville, Tennessee, this October 16, 1970, A. Battle Rodes Trustee of Tennessee Central Railway Company This 7th day of October, 1970. /s/, WILLIAM FE, MILLER Judge /s/ CARMACK COCHRAN Attorney for A. Battle Rodes, Trustee | —s = APPENDIX E United States Court of Appeals for the Sixth Circuit In the Matter of: + Tennessee Central Railway Company, Debtor, United States of America, Plaintiff-Appellant, L No. 71-1228, vs. A. Battle Rodes, Trustee of Tennes- see Central Railway Company, Defendant-Appellee. : ORDER (Filed April 4, 1971) Before: Weick, Edwards and Peck, Circuit Judges. Petitions for rehearing and a suggestion for rehearing in bane having been filed by defendants-appellees in the above-styled case, and no judge of this court having moved for rehearing in benc and the petition for rehearing hav- ing been assigned to the panel which heard the case, with Judge Paul C. Weick designated to serve in place of Judge Henry L. Brooks, deceased, said petitions are hereby denied, for the reasons set forth in the opinion of the court. Entered by order of the Court. JAMES A. HIGGINS Clerk ERENT RIL BOE PHU TGR ERE RE ROH t LR a Fi So APPENDIX F RELEVANT SECTIONS OF §77 OF THE NATIONAL BANKRUPTCY ACT (11 U.S.C. § 205; 49 Stat. 911) Section 77(b) (11 U.S.C. 205(b)) The term ‘‘claims’’ includes debts, whether liquidated or unliquidated, securities (other than stock and option warrants to subscribe to stock), liens, or other interests of whatever character. For all purposes of this section unsecured claims, which would have been entitled to pri- ority 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 sep- arate class or classes of creditors. Section 77(e) (11 U.S.C. 205(e)) (e): Provided further, That if, in any reorganization proceeding under this section, the United States is a cred- itor on claims for taxes or customs duties (whether or not the United States has any other interest in, or claim against, the debtor, as creditor or stockholder), no plan which does not provide for the payment thereof shall be confirmed by the judge except upon the acceptance, cer- tified to the court, of a lesser amount by the President of the United States or the officer or agency designated by him pursuant to the provisions of the preceding paragraph hereof: Provided further, That if the President of the Pests — A-55 — United States or such officer or agency shall fail to accept or reject such lesser amount for more than ninety days after receipt of written notice so to do from the court, accompanied by a certified copy of the plan, the consent of the United States insofar as its claims for taxes or cus- toms duties are concerned shall be conclusively presumed. iin ACT MARCH 3, 1797, CH. 20, §5, 1 STAT. 515 ACT MARCH 2, 1799, CH. 22, § 65, 1 STAT. 676 RS. § 3466 (31 U.S.C. § 191) §191. Priority established Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or administrators, is insuff- cient 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 ab- sent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed. B.S. § 3466. — A-57 — APPENDIX H RELEVANT PORTION OF 15 U.S.C. 603 Reconstruction Finance Corp. $603. Period of succession; employment of personnel; pri- ority of debts due Corporation; death or injury benefits of employees Debts due the Corporation, whether heretofore or here- after arising, shall not be entitled to the priority avail- able to the United States pursuant to section 191 of Title 31 except that the Corporation shall be entitled to such priority with respect to debts arising from any trans- action pursuant to any of the following Acts or provisions in effect at any time: Sections 5d(1) and 5d(2) of the Reconstruction Finance Corporation Act added by section 5 of the Act entitled ‘‘An Act to authorize the purchase by the Reconstruction Finance Corporation of stock of Federal home-loan banks; to amend the Reconstruction Finance Corporation Act, as amended, and for oth [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_1134%3A1. Public record. Not legal advice.