Brief for the United States — Seaboard Coast Line Railroad v. McDaniel

Opinions below

Jurisdiction ____

Statement

Re shehatihtiahad setabia

Eh toed 11

1

a 2

Questions presented 2

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5

CITATIONS

Cases:

Massachusetts v. United States, 333 U.S.

UNS ie Ce lee aa eae a 8

Small Business Adm’n v. McClellan, 364

eR EE peek a om ee 8

United States v. Emory, 314 U.S. 423 __ 9

United States v. Guaranty Tr. Co., 280

I irc 8

United States v. Key, 397 U.S. 322 5, 6, 7

United States v. Remund, 330 U.S. 539. 8

United States v. Texas, 314 U.S. 480 ___ 8

United States v. Waddill Co., 323 U.S.

i ; 8

Wagner v. McDonald, 96 F. 2d 273 ___ 10

| Statutes:

; Bankruptcy Act, 30 Stat. 544, as amend-

ed, 11 U.S.C. 1 et seq.:

Section 77, 11 U.S.C. 205 2, 3,5, 6, 7,8

Section 77(b), 11 U.S.C. 205(b) ___ 7

Section 77(n), 11 U.S.C. 205(n)

Statutes—Continued Page

R.S. 3466, 31 U.S.C. 191 3, 5, 6, 7, 8, 9, 10

Reorganization Plan No. 1 of June 30,

1957 (71 Stat. 647):

Section 2(d) (1) 8

Section 3 8

Section 6 8

9

9

5

80 Stat. 632, Section 8 aie

15 U.S.C. (1964 ed.) 603 8,

Tennessee Code Anno., Section 65-1021.

Miscellaneous:

H. Rep. No. 901, 89th Cong., 1st Sess. _

Iu the Supreme Court of the United States

Nos. 71-1680, 72-21, 72-24, 72-62

IN THE MATTER OF TENNESSEE CENTRAL

RAILWAY COMPANY, ET AL., PETITIONERS

A. BATTLE RODES, TRUSTEE OF

TENNESSEE CENTRAL RAILWAY COMPANY, ET AL.

— 2 s

SP Gud web aOR ELIT BITRE RS PhS oe a

ON PETITIONS FOR WRITS OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

BRIEF FOR THE UNITED STATES IN OPPOSITION

The opinion of the court of appeals is not yet re-

ported (R.R. Pet, App. 1-20). The opinion of the

district court is reported at 316 F. Supp. 1103 (R.R.

Pet. App. 21-46).

*“R.R. Pet. App.” reference is to the Appendix to the peti-

tion filed by the railroads in No. 71-1680.

OCTOBER TERM, 1972

Uv.

THE SIXTH CIRCUIT

OPINIONS BELOW

(1)

ESSIEN RRNA OI YPN AP SLED PEER RCA LG CRI AN COS RRS

2

JURISDICTION

The judgment of the court of appeals was entered

on February 2, 1972 (R.R. Pet. App. 1-15). A time-

ly petition for rehearing was denied on April 4, 1972

(R.R. Pet. App. 58). The petitions for writs of cer-

tiorari were filed on June 23, 1972, in No. 71-1680,

on July 1, 1972, in No. 72-21, on July 3, 1972, in

No. 72-24, and on July 11, 1972, in No. 72-62. The

jurisdiction of this Court is invoked under 28 U.S.C.

1254(1).

QUESTIONS PRESENTED

1. (a) Whether the federal statute giving the

United States priority in insolvency proceedings for

the debts due to it is applicable in a proceeding under

Section 77 of the Bankruptcy Act.

(b) If it is, whether the statute is applicable to

a claim of the United States, transferred from the

Reconstruction Finance Corporation, which was not

entitled to the priority of the United States at the

time the loan was made.

2. If the statute is not applicable, whether the

claims of “six months” creditors, asserting interline

accounts and the furnishing of supplies and services

to the railroad before it was placed in reorganization,

are entitled to priority in payment ahead of the mort-

gage bondholders where no current income was di-

verted to the bondholders.

3

STATEMENT

The Tennessee Central Railway Company (“the

debtor”) is in reorganization under Section 77 of the

Bankruptcy Act (11 U.S.C, 205); it ceased opera-

tions after selling its lines to other carriers. Peti-

tioners are certain of the Tennessee Central’s credi-

tors: they are railroads, local government units, and

industrial companies, The United States claims pri-

ority to the remaining assets of the debtor railroad

under the federal insolvency statute (R.S. 3466, 31

U.S.C. 191) and as holder of all of the debtor’s first

mortgage bonds.

In December 1967, the debtor was placed in reor-

ganization and a trustee was appointed. For several

years before the debtor had operated at a loss; its

income was insufficient to pay the costs of operation

and no payment was made on the fixed charges. The

debtor’s losses steadily increased during this period

from about $204,000 in 1963 to about $1,680,000 in

1967. The total loss during this 5-year period was

about $4.5 million (J. App. 30).’

At the time the debtor was placed in reorganiza-

tion, it was in default in the payment of interest on

its bonded indebtedness, in payment of its equipment

trusts, taxes due to various county and municipal

authorities, the payment due to other railroads on .

interline accounts and per diem charges, and to sup-

pliers. This situation had existed for more than six

2“J. App.” reference is to the Joint Appendix filed in the

court of appeals.

4

months prior to the commencement of reorganization.

As a result of its failure to pay its interline accounts

with other railroads, the debtor either had been

placed on a pre-payment basis (requiring payment

before a connecting carrier would accept shipments,

contrary to the ordinary practice) or was in the

process of being put in that situation by the other

carriers, at the time it was placed in reorganization.

Subsequent to being placed in reorganization, the

debtor had no operating profit and was able to con-

tinue operation only through the sale of certain as-

sets. This condition continued until August 31, 1968,

when the debtor ceased all operations.*

The primary claim of the United States arises

from two loans to the debtor made by the Reconstruc-

tion Finance Corporation (“RFC”) and transferred

to the Secretary of the Treasury when the RFC was

abolished in 1957. At the time the debtor went into

reorganization, it owed the United States more than

$5,200,000 on these loans.*

The railroad petitioners seek recovery for inter-

line claims totalling approximately $900,000, which

accrued within the six months before the reorgan-

ization petition was filed. The local governments

seek recovery of back taxes for periods prior to the

filing of the reorganization petition totalling about

* The remaining assets of the debtor, consisting of cash

and property, totalled approximately $3 million; the claim

of the government was more than $5 million.

‘The United States also has freight damage, loss and over-

charge claims totalling about $60,000.

_—_

5

$105,000. The Koppers Company claims approxi-

mately $121,000 based upon the furnishing of cross-

ties, and relies both upon the equitable principle

giving priority in certain situations to claims that

accrued within six months before receivership, and

upon the Tennessee Code Anno. Section 65-1021,

which grants priority to certain suppliers of a rail-

road. Humble Oil also has a claim under the “six

months” rule for diesel fuel supplied to the debtor.

The district court held that R.S. 3466 is inappli-

cable in a Section 77 proceeding and that the inter-

line carriers, suppliers and local taxing authorities

have priority over the claim of the United States

based on its mortgage bonds (R.R. Pet. App. 21-44).

A divided court of appeals reversed (R.R. Pet. App.

1-15). Relying on United States v. Key, 397 U.S.

322, it ruled that the United States has priority in

a Section 77 railroad reorganization proceeding under

R.S. 3466 for debts due it over the other claimants

involved herein.

ARGUMENT

The principal issue raised by petitioners—whether

the priority of the United States under R.S. 3466

applies in railroad reorganizations under Section 77

of the Bankruptcy Act—is settled by United States

v. Key, 397 U.S. 322. The other issues are of little

general and even less prospective importance. The

* Petition No. 72-62 was filed by Wilson County, Tennessee,

after the 90 day jurisdictional time limit applicable in civil

cases.

A mE AEE SPDT RS SM INDIO

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Reconstruction Finance Corporation was abolished

15 years ago, and the two RFC notes involved here

are the only ones still outstanding which evidence

loans to railroads.

To prevail, petitioners must establish (1) that the

United States’ insolvency priority under R.S. 3466

is not applicable in railroad reorganization proceed-

ings under Section 77 of the Bankruptcy Act, and

(2) that they are within the class of unsecured cred-

itors accorded an equitable priority as “six months

creditors,” or are otherwise entitled to a priority over

the secured government claims. If petitioners fail

on either ground, their claims cannot be sustained.

The court below rejected petitioners’ first contention

and thus did not reach the second issue. We submit -

that this disposition of the case was correct. As

noted in footnote 10, infra, however, we also believe

petitioners’ arguments with respect to the second

issue are without merit.

1. Section 3466 of the Revised Statutes provides

that in the case of an insolvent estate any debts due

to the United States shall be “first satisfied.” This

priority was recently upheld by this Court in a

Chapter X reorganization proceeding. The Court

noted that Section 77 served as a model for Chapter

X, and that “[nJothing in § 77 casts any doubt on

the continued priority of the United States under

§ 3466.” United States v. Key, 397 U.S. at 330. The

Court concluded that Ҥ 3466 must apply according

to its terms except where expressly superseded, or

where excluded by a later enactment ‘plainly incon-

sistent’ with it.” (Jd. at 332).

_—

To support their contention that R.S. 3466 is not

applicable in a Section 77 proceeding, petitioners rely

on Section 77(b), which provides:

For all purposes of this section unsecured claims,

which would have been entitled to priority if a

receiver in equity of the property of the debtor

had been appointed by a Federal court on the day

of the approval of the petition, shall be entitled

to such priority and the holders of such claims

shall be treated as a separate class or classes of

creditors.°

As the court of appeals recognized (R.R. Pet. App.

5), “[t]he difficulty with [petitioners’] argument is

that section 77(b) contains no language arguably re-

ferring to or superseding the effect of § 3466.” That

court correctly interpreted the Key decision as hold-

ing that such an intention is not inferable from gen-

eralized provisions or rules dealing with priority in

bankruptcy. Instead, these provisions are to be read

consistently with R.S. 3466 as allocating the priorities

among all creditors except the governmeiit. This

Court’s analysis of the legislative intention also re-

quired the result reached below.’

7

* Aside from Section 77(n), pertaining to claims of injured

employees, this is the only provision in Section 77 pertaining

to priorities.

* Petitioners point out that the Court in United States v.

Key was referring to the original Section 77, and not neces-

sarily to Section 77, as amended in 1935 (R.R. Pet. 13-14).

However, this Court’s statements are fully applicable to the

amenied Section 77, since nothing in the amendments, nor in

the legislative history, suggests any intention to alter the

established priority of the United States under Section 3466.

Compare this Court’s comments with respect to the enactment

in 1934 of Section 77B. See 397 U.S. at 331.

——

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2. In addition to contending that R.S. 3466 is never

applicable in a Section 77 proceeding, petitioners urge

that R.S. 3466 does not apply because the claim of

the United States is based upon RFC loans.’ Peti-

tioners point out that, when the loans were made, the

RFC did not have the priority of the United States

under R.S. 3466. See 15 U.S.C. (1964 ed.) 603.

When the RFC was abolished effective June 30, 1957,

by Reorganization Plan No. 1, however, this loan was

transferred to the Secretary of Treasury, who has

administered the loan since then (J. App. 294).° Thus,

* With regard to the RFC aspect of the case, petitioners rely

on United States v. Guaranty Tr. Co., 280 U.S. 478. While

that case has never been explicitly overruled, it is inconsistent

with numerous subsequent decisions of this Court in addition

to the Key case discussed above. See Massachusetts V. United

States, 333 U.S. 611, 624-629; United States v. Remund, 330

U.S. 539; United States v. Texas, 314 U.S. 480; United States

v. Waddill Co., 323 U.S. 353; Small Business Adm’n V. McClel-

lan, 364 U.S. 446.

® Reorganization Plan No. 1 of June 30, 1957, Section

2(d) (1), transferred to the Secretary of the Treasury all of

the functions of RFC with respect to or arising out of “pro-

grams of financial assistance to railroad companies * * *” (J.

App. 297). Section 3 of the plan entitled “Transfer of assets

and liabilities” provided that “The loans, obligations, securi-

ties, capital stock, and other assets pertaining to the func-

tions transferred by section 2 of this reorganization plan (in-

cluding accrued interest thereon, and property acquired in

connéction therewith) and the liabilities, contracts, bonds,

mortgages, notes and other instruments relating thereto are

hereby transferred from the Corporation to the respective

transferees” (Ibid.). Section 6 of the Reorganization Plan

abolished the Corporation as of June 30, 1957. Since that

date, the Department of the Treasury has uniformly treated

all debts and obligations as owing to the United States of

America.

_—

ten years before petitioners’ claims arose, the RFC

loan became a claim of the United States. Any re-

covery on this claim will be deposited in the United

States Treasury, and any non-payment is a direct loss

to it (J. App. 296). |

Even if the derivation of the claim were pertinent,

the statute eliminating the RFC’s priority was re-

pealed prior to the transactions upon which the

competing creditors base their claims, On Septem-

ber 6, 1966, the provision in 15 U.S.C. 603 was re-

pealed, because it was obsolete. H. Rep. No. 901,

89th Cong., 1st Sess., p. 390.

This legislation further provided in Section 8 (80

Stat. 632) :

The laws specified in the following schedule

are repealed except with respect to rights and

duties that matured, penalties that were in-

curred, and proceedings that were begun, before

the effective date of this Act * * *.

Since none of the petitioners’ claims had arisen at

the time of the repeal of 15 U.S.C. 603 in 1966, no

rights and duties had matured, no penalties had been

incurred and no proceedings had begun with respect

to this statute. Thus, when petitioners’ claim ac-

crued, these loans had the same status as any other

claims held by the United States.

Moreover, the source of a claim of the United

States is not determinative of the applicability of R.S.

3466. See United States v. Emory, 314 U.S. 423,

where the United States had acquired its claim from

a private bank, which had no priority, under a gov-

9

10

ernment-guaranteed loan. The government was never-

theless held entitled to priority under R.S. 3466. See

also Wagner v. McDonald, 96 F.2d 273, 275 (C.A.

8):

Neither is there merit in the first contention;

that, because the right of priority did not at-

tach to the notes in the hands of the bank when

they were executed, the attribute of priority

was not created when they became the property

of the United States. Under section 3466, prior-

ity of payment does not depend upon how the

United States acquired title to the notes, nor

upon their status prior to their transfer. Priority

is the result of insolvency of the debtor and own-

ership of the claim by the United States.”

1° The petitioners’ claim of priority over the government

as “6 months” creditors was not reached by the court below

and not discussed by petitioners. Therefore, no extended

refutation of that claim is appropriate. However, under the

particular facts of this case the claim is without merit, since

there is no fund to which “6 months” creditors can look for

payment, and the equitable considerations under which they

might establish priority in the absence of such a fund are not

present.

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CONCLUSION

For the foregoing reasons, it is respectiully sub-

mitted that the petitions for writs of certiorari should

be denied.

ERWIN N. GRISWOLD,

Solicitor General.

HARLINGTON WOOD, JR.,

Assistant Attorney General.

WALTER H. FLEISCHER,

RONALD R. GLANCZ,

Attorneys.

AucustT 1972.

ss. 8. covenensary PRIBTING OFFICE; 1972 473517 60