1. In providing by Title II of the Transportation Act (1) for
the funding of indebtedness of railroad carriers to the United
States
Page 280 U. S. 479
incurred for additions and betterments made during federal
control and properly chargeable to capital account; (2) for the
evidencing by notes of other then existing indebtedness of the
carriers to the United States; (3) for advances to carriers by the
Secretary of the Treasury, upon certification by the Interstate
Commerce Commission, on account of the guaranty of operating income
for the six months following federal control, and for repayment by
carriers of amounts advanced in excess of the guaranty, and (4) for
loans to carriers, to meet their maturing indebtedness or to
provide equipment, etc., for the purpose of enabling them properly
to serve the public during the transition period immediately
following federal control, Congress intended to exclude the
indebtedness so arising from the scope of Rev.Stats. § 3466, which
confers priority on debts owed the United States by insolvents. P.
280 U. S.
484.
2. This conclusion follows from the general purpose of Title II
to rehabilitate railroad credit and preserve the existing
transportation system, and from the specific means it provides to
insure repayment, other than the priority provision of § 3466.
Id.
33 F.2d 533 affirmed.
Certiorari,
post, p. 546, to review a decree of the
circuit court of appeals which affirmed a decree of the district
court denying priority of payment to claims of the United States
against the receiver of an insolvent railroad.
Page 280 U. S. 480
MR. JUSTICE BRANDEIS delivered the opinion of the Court.
On July 26, 1923, the federal court for Minnesota appointed a
receiver of the Minneapolis & St. Louis Railroad upon a
creditor's bill, which was later consolidated with suits to
foreclose its mortgages. The usual order issued for proof of
claims. The United States presented four claims arising under Title
II of Transportation Act 1920, February 28, c. 91, 41 Stat. 456,
457-469. As to each claim, it asserted that, by § 3466 of the
Revised Statutes, U.S.C. Tit. 31, § 191, it was entitled to
preference and priority over the claims of all other creditors,
secured or unsecured. Opposing creditors conceded that the railroad
was insolvent within the meaning of § 3466.
United States v.
Butterwoth-Judson Corporation, 269 U.
S. 504. The insistence that the United States did not
have priority was rested, among other grounds, upon the origin and
character of its claims. The master and the district court denied
the United States priority over any creditor. The circuit court of
appeals affirmed that decree, but limited its decision to a denial
of priority over secured creditors and those whose claims were
preferred by local law or by the rule of
Fosdick v.
Schall, 99 U. S. 235. It
did not consider the relation of the government's claims to those
of general creditors, because it concluded that the estate would
not realize more than enough to satisfy the secured and preferred
creditors, and because general creditors were not parties to the
appeal. 33 F.2d 533. A writ of certiorari was granted.
Title II of Transportation Act 1920, comprising §§ 200 through
211, is headed "Termination of Federal Control."
Page 280 U. S. 481
Section 207 (41 Stat. pp. 462, 463), provides that the
"indebtedness of each carrier to the United States, which may
exist at the termination of federal control, incurred for additions
and betterments made during federal control and properly chargeable
to capital account . . . shall, at the request of the carrier, be
funded for a period of ten years from the termination of federal
control, or a shorter period at the option of the carrier,"
and also that any other then existing indebtedness to the United
States should be evidenced by notes payable in one year from the
termination of federal control, or less at the option of the
carrier. For both classes of debts, the carrier is to pay interest
at the rate of 6 percent per annum, and, in the discretion of the
President, to give such security as he may require. [
Footnote 1] Two of the claims of the United
States here in question are based on promissory notes made pursuant
to this section. Each of the two notes is in the amount of
$625,000. One is dated May 27, 1922, and is due March 1, 1930, 10
years after termination of federal control; the other is dated
April 1, 1923, and is payable on demand. Each bears interest at 6
percent, payable semiannually, and is secured by a deposit of the
company's series A 50-year refunding and extension mortgage bonds,
dated January 1, 1912.
Page 280 U. S. 482
The third claim arose under § 209. That section (41 Stat. at p.
466) authorizes the Secretary of the Treasury, upon certification
by the Interstate Commerce Commission, to advance to any carrier,
on account of the guaranty of operating income there provided for
the six months following the termination of federal control, sums
"necessary to enable it to meet its fixed charges and operating
expenses" -- the advances to be "secured in such manner as the
Secretary may determine" -- and provides for repayment by the
carrier of any amount proved to have been paid in excess of the
guaranty.
Compare Great Northern Ry. Co. v. United States,
277 U. S. 172. The
amount claimed by the United States under this section is
$292,022.23, which sum the Interstate Commerce Commission certified
had been advanced in excess of the guaranteed amount.
See
Guaranty Settlement With Minneapolis & St. Louis R. Co., 86
I.C.C. 691.
The fourth claim arose under § 210 (p. 468).
"For the purpose of enabling carriers . . . properly to serve
the public during the transition period immediately following the
termination of federal control,"
that section, as amended by Act of June 5, 1920, c. 235, § 5, 41
Stat. 874, 946, authorizes loans by the government to carriers, if
a loan is required by a carrier "to meet its maturing indebtedness,
or to provide itself with equipment or other additions and
betterments." The loans are to be made only on security, for a
period not in excess of 15 years, and if application therefor is
made to the Interstate Commerce Commission within 2 years from the
termination of federal control. And no loan can be made, unless the
Commission first finds and certifies that the loan is necessary to
enable the applicant to meet the transportation needs of the
public,
"that the prospective earning power of the applicant and the
character and value of the security offered are such as to furnish
reasonable assurance of the applicant's ability to repay the loan
within the time
Page 280 U. S. 483
fixed therefor, and to meet its other obligations in connection
with such loan . . . and that the applicant . . . is unable to
provide itself with the funds necessary for the aforesaid purposes
from other sources."
The claim under this section is on a promissory note for
$1,382,000 dated April 1, 1921, which was given in consideration of
a loan of that amount, made to enable the company to pay a maturing
issue of its outstanding mortgage bonds. The note is payable in 10
years, with interest semiannually at the rate of 6 percent, and is
secured by a deposit of the company's series A, 50-year refunding
and extension mortgage bonds, dated January 1, 1912.
See
Loan to Minneapolis & St. Louis R. Co., 67 I.C.C. 321, 323;
Bonds of Minneapolis & St. Louis R. Co., 67 I.C.C. 362.
The alleged priority of the United States under § 3466 over
mortgages and over unsecured claims preferred by local law
(
compare Spokane County v. United States, 279 U. S.
80), or by the rule of
Fosdick v. Schall,
supra, was discussed in the lower courts and was argued by
counsel before this Court. But we have no occasion to consider
these questions. For we are of opinion that it was the purpose of
Congress that § 3466 should not apply to any indebtedness of the
railroads to the United States arising under §§ 207, 209 or 210 of
Transportation Act 1920.
During federal control, the government had been obliged to
provide most of the new capital required for equipment,
improvements, and extensions, [
Footnote 2] and some of the funds needed to meet current
interest and dividend payments. [
Footnote 3] The federal control Act, March 21, 1918, c.
25,
Page 280 U. S. 484
§ 6, 40 Stat. 451, 455, appropriated $500,000,000 to "be used by
the President as a revolving fund for the purpose," among other
things, of providing "terminals, motive power, cars, and other
necessary equipment." The Act of June 30, 1919, c. 5, 41 Stat. 34,
appropriated $750,000,000 more. The Transportation Act, 1920, §
202, and § 210(e), made a similar provision in appropriating, for
the purposes of Title II, $500,000,000, in addition to the sums
otherwise available, and in addition to the general appropriations
made in §§ 204(g) and 209(g), (h), and (i).
These appropriations were made in order to meet a pressing need.
At the time of the passage of Transportation Act 1920, most of the
railroads of the United States lacked funds for necessary
improvements, equipment, and expansion of facilities. Some of the
carriers needed funds, also, to meet maturing obligations. The
credit of many carriers was seriously impaired. There was a general
reluctance among investors to purchase new railroad securities even
of the strongest railroads. Congress deemed it important to
preserve for the nation substantially the whole existing
transportation system.
Compare New England Divisions Case,
261 U. S. 184,
261 U. S. 190.
In order to accomplish this, it was thought necessary that the
United
Page 280 U. S. 485
States should, to a certain extent, finance the carriers until
it would become possible to restore their credit, by increase of
rates or otherwise. The provisions of Title II of Transportation
Act, 1920, were framed to that end. Through them, the financial aid
which had been given during federal control was to be extended for
a further period.
To have given priority to debts due the United States pursuant
to Title II would have defeated the purpose of Congress. It not
only would have prevented the reestablishment of railroad credit
among bankers and investors, but it would even have seriously
impaired the market value of outstanding railroad securities. It
would have deprived the carriers of the credit commonly enjoyed
from supplymen and others; would have seriously embarrassed the
carriers in their daily operations, and would have made necessary a
great enlargement of their working capital. The provision for loans
under § 210 would have been frustrated. For, carriers could ill
afford voluntarily to contract new debts thereunder which would
displace,
pro tanto, their existing bonded indebtedness.
The entire spirit of the Act makes clear the purpose that the rule
leading to such consequences should not be applied.
Moreover, Congress evidenced unmistakably its purpose to rely,
for obtaining payment of the government's advances, upon means
other than the priority provided for by § 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 Commerce 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.
[
Footnote 4] The interest rate
required
Page 280 U. S. 486
is much greater than that which ordinarily accompanies even a
business 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 arising
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,
271 U. S. 240.
Affirmed.
[
Footnote 1]
See Report of Director General for the period December
31, 1921, 67th Cong., 2d Sess., H.R.Doc. 180, p. 12:
"The total amount expended by the Railroad Administration for
such additions and betterments aggregates $1,144,681,582.39. The
Transportation Act of 1920 in Section 207, anticipated that the
carriers might not be able to pay out of the compensation and other
sums due them from the government all the sums due the government
on account of capital expenditure, and therefore provided that only
so much of the indebtedness due from the United States to the
carriers should be offset by the indebtedness due the United States
from the carriers 'as deemed wise by the President,' and further
provided that any funding obtained by the carriers should be
granted only upon their giving security in such form and upon such
terms as the President may prescribe. . . ."
[
Footnote 2]
See note 1
supra. Of the amount expended for these purposes during
federal control, only $140,000,000, approximately, was paid through
funds raised by the companies. Report of the Director General to
the President for 14 months ended March 1, 1920 (Revised Edition,
1921), p. 31.
[
Footnote 3]
Mainly, for this purpose, the Director General advanced to the
carriers between the commencement of federal control and August 1,
1918, $203,714,050. Report of the Director General for period
ending July 31, 1918, pp. 23-24. In the statement of the President
accompanying his Proclamation of December 26, 1917, on taking
possession of the railroads, he had stated:
". . . The financial interests of the government and the
financial interests of the railways must be brought under a common
direction. . . . Investors in railway securities may rest assured
that their rights and interests will be as scrupulously looked
after by the government as they could be by the directors of the
several railway systems."
U.S. R. R. Administration Bulletin No. 4 (Revised 1919), p. 10.
See also Report of Senate Committee, November 10, 1919,
No. 304, 66th Cong., 1st Sess., pp. 3-12; Report of House
Committee, November 10, 1919, No. 456, 66th Cong., 1st Sess., pp.
12-13; Walker D. Hines, "War History of American Railroads," pp.
120-140.
[
Footnote 4]
In some instances the Commission has authorized security which
expressly provided only deferred liens. Loan to Chicago, Rock
Island & P. Ry., 67 I.C.C. 569; Loan to Minneapolis & St.
Louis R. Co., 67 I.C.C. 580; Equipment Notes of Minneapolis &
St. Louis R. Co., 70 I.C.C. 67.