Where a railroad system, in a reorganization proceeding under §
77 of the Bankruptcy Act, includes a leased line, operated at a
loss and which cannot be operated by its owner, and where, by order
of the court, the trustees have rejected the lease but have
continued to operate the leased road for the account of the
lessor,
Page 310 U. S. 133
the amount of the deficit chargeable to the lessor and to impose
a first lien on the leased property to secure it, and to do this
after proceedings for reorganization of the lessor company under §
77 have been instituted in another district where the leased line
is situate. P.
310 U. S.
140.
108 F.2d 164 affirmed.
Certiorari, 309 U.S. 645, to review the affirmance of an order
of the District Court in a railroad reorganization proceeding under
§ 77 of the Bankruptcy Act. The order fixed the amount of a deficit
arising from the operation of a leased line and declared it a first
lien on the leased property. Only the question of the bankruptcy
court's jurisdiction to do this was brought here.
Page 310 U. S. 135
MR. JUSTICE REED delivered the opinion of the Court.
The Boston and Providence Railroad Corporation, in 1888, leased
its property, a line of road running between Boston and Providence,
for 99 years to the Old Colony Railroad. It has continued as a
separate corporation, receiving and distributing its rent, and is
not a subsidiary or affiliate of the New Haven or the Old Colony.
In 1899, the Old Colony leased its lines, including its leasehold
in the Boston and Providence, to the New York, New Haven, and
Hartford Railroad for 99 years. The New Haven operated its own and
the leased property until it was put into reorganization under
Section 77 of the Bankruptcy Act [
Footnote 1] in the District Court of Connecticut on
October 23, 1935. The trustees of the New Haven operated the Old
Colony under the lease until they rejected the lease by order of
the court on June 2, 1936. Next day, the Old Colony filed under
Section 77 in the same Connecticut court as a subsidiary debtor,
the court appointed the trustees of the New Haven trustees of the
Old Colony, and, on June 18, 1936, the court ordered the New Haven
trustees to continue to operate the Old Colony as an integral part
of the New Haven, the operation being for the account of the Old
Colony. The order provided that, in the event leases of the Old
Colony were later rejected, payments for operating the leased
property and payments of rent under the lease would be deemed to
have been for the account of the lessor, and could be recovered
from the
Page 310 U. S. 136
leased property prior to any mortgage or lien thereon. On July
19, 1938, the court directed the trustees of the Old Colony to
reject the lease of the Boston and Providence and to continue
operation of the road for the account of the Boston and Providence
pursuant to Section 77(c)(6). On August 4, 1938, the Boston and
Providence was put into reorganization in the District Court of
Massachusetts. Previously the system had been operating at a loss,
and the trustees of the New Haven and the Old Colony asked the
Connecticut court to determine the amount of the deficit
attributable to the Boston and Providence for the period from June
4, 1936, to December 31, 1937, and to declare that amount a lien on
the Boston and Providence in favor of the New Haven and the Old
Colony. On January 16, 1939, the Connecticut court decided that it
had jurisdiction to grant the requested lien on the Boston and
Providence, although that road was under reorganization in another
bankruptcy court, and on April 20, 1939, the court entered an order
fixing the amount of the deficit and declaring it a first lien on
the property of the Boston and Providence. The Circuit Court of
Appeals, holding that the Connecticut court had jurisdiction to
determine the lien, affirmed the order of January 16, 1939, but
concluded that the Boston and Providence had been given no chance
to be heard on the merits of the question, and remanded the later
order for a determination of the "existence and amount of the
obligation." [
Footnote 2]
The obligation on which the claimed lien is based arises, so the
trustees of the New Haven and the Old Colony contend, from the
operation of the Boston and Providence under Section 77(c)(6) by
the Old Colony for the account of the Boston and Providence.
Petitioners deny that Section 77(c)(6) was properly invoked, and
claim that the deficit is not chargeable to them. This phase of the
controversy
Page 310 U. S. 137
is not before us, for petitioners have brought here only the
question of the Connecticut court's jurisdiction to determine the
amount of the deficit chargeable to the Boston and Providence, and
to impose a lien on its property to secure it. If the Connecticut
court has that jurisdiction, it will determine whether the deficit
is chargeable to the Boston and Providence when it determines the
"existence and extent of the obligation" pursuant to the order of
remand of the Court of Appeals.
The controversy has substance because of the contention of the
trustees for the Boston and Providence that, as the court charged
with the reorganization of that road (the Massachusetts District
Court) has "exclusive jurisdiction" under Section 77(a) "of the
debtor and its property wherever located," the Connecticut court
cannot consider the claims of the New Haven and Old Colony trustees
for operating deficits or impose a lien on the Boston and
Providence property to secure them.
The lease of the Boston and Providence to the Old Colony is the
type of lease covered by the order of June 18, 1936, by which the
trustees of Old Colony were authorized to charge operating deficits
against the lessor in the event of subsequent disaffirmance of the
lease.
Railroad reorganization in bankruptcy is a field completely
within the ambit of the bankruptcy powers of Congress. [
Footnote 3] Under the commerce clause
of the Constitution, Congress likewise has exercised its power to
provide for the continued operation of interstate railroads such as
petitioner. [
Footnote 4] The
fact that the operator operates under a
Page 310 U. S. 138
lease does not affect the force of the requirement that the
operation must continue until a certificate permitting abandonment
is issued by the Interstate Commerce Commission. [
Footnote 5] The judicial functions of the
bankruptcy court and the administrative functions of the Commission
work cooperatively in reorganizations. [
Footnote 6] Provision is made by the Bankruptcy Act
[
Footnote 7] for the operation
of leased property on surrender. It is under this subsection that
respondent claims to have become entitled to the amount sought in
the motion for allowance and lien. This subsection modifies
pro
tanto the rule of the Interstate Commerce Act for
operation.
The property of the Boston and Providence came into the
possession of the trustees of the New Haven and the Old Colony and
remained there during the entire time covered by the claim. These
roads were lessees of the property and debtors under Section 77 in
the Connecticut court. It is immaterial what title the debtors had,
whether a lease or a fee. The physical property covered by the
lease
Page 310 U. S. 139
was in the custody of the Connecticut court by virtue of the
provision of § 77(a). [
Footnote
8] By virtue of subdivisions 77(c)(10) and 77(c)(6), [
Footnote 9] it is clear that leaseholds
are in some instances to be operated by the lessee's trustees.
This Court has held "upon principles of general application"
that courts having custody of property or a fund have the power
"to require that expenses which have contributed either to the
preservation or creation of the fund in its custody shall be paid
before a general distribution among those entitled to receive it.
[
Footnote 10]"
Such a power reposes in any court charged with custody of
property. It is an
in rem jurisdiction springing from
possession of the property which is necessary in order that the
court may adequately care for the property. Thus, a court having
custody of a ship is able to secure wharfage by virtue of its power
to decree a preferential payment. [
Footnote 11] And here, the court is able to carry out the
operation of the Boston and Providence by promising or granting a
lien to those who carry out the operation.
Page 310 U. S. 140
If the Connecticut court has possession of the property and
operated it under § 77(c)(6) for its owners, could it fix a lien on
the property after another bankruptcy court took the administration
of the property? By § 77(c)(6), railroads in reorganization which
had been operating lines under lease were allowed to reject the
lease, but required to continue operation of the leased lines if
the lessor had no ability to operate. Thus, Congress recognized the
possible occurrence of the situation now before us, and evinced a
desire that rail service should not, in such a case, be
interrupted. In view of the public importance of rail service, we
think this subsection represents an intention to give the court
charged with operation the fullest ability to secure the
necessities of operation -- an intention to give the operating
court power to promise those having the materials, men, and
equipment needed for operation a first lien on the road to secure
payment for the operation. [
Footnote 12] This in no way impairs the operation of §
77(a), which grants to the Massachusetts court,
"during the pendency of the proceedings under this section and
for the purposes thereof, . . . exclusive jurisdiction of the
debtor and its property wherever located."
The "purposes" of § 77 include the development of a "fair and
equitable" [
Footnote 13]
plan of reorganization. The Massachusetts court is left with
jurisdiction to accomplish this, but is bound to recognize the
priority of the lien declared by the Connecticut court. By §
77(c)(6), the Connecticut court was given jurisdiction
Page 310 U. S. 141
so long as it continued to operate the road to grant a lien for
operating expenses prior to any existing claims against the road.
The decision of the Court of Appeals that the Connecticut court had
jurisdiction to grant the lien sought by respondent is
Affirmed.
[
Footnote 1]
11 U.S.C. § 205.
[
Footnote 2]
108 F.2d 164, 169.
[
Footnote 3]
Continental Illinois Nat. Bank & Trust Co. v. Chicago,
R.I. & P. Ry. Co., 294 U. S. 648,
294 U. S.
667-675.
[
Footnote 4]
Interstate Commerce Act, § 1 (18), as amended 49 U.S.C. § 1
(18):
"Extension or abandonment of lines; certificate required. -- . .
. and no carrier by railroad subject to this chapter shall abandon
all or any portion of a line of railroad, or the operation thereof,
unless and until there shall first have been obtained from the
commission a certificate that the present or future public
convenience and necessity permit of such abandonment."
[
Footnote 5]
Cf. Seaboard Air Line Railways Receivers Proposed
Abandonment, 202 I.C.C. 543; Norfolk S. R. Co. Receivers
Abandonment, 221 I.C.C. 258; Meck and Masten, Railroad Leases and
Reorganization: I, 49 Yale L.J. 626.
[
Footnote 6]
Palmer v. Massachusetts, 308 U. S.
79,
308 U. S. 87,
note 14.
[
Footnote 7]
§ 77(c)(6).
"If a lease of a line of railroad is rejected, and if the
lessee, with the approval of the judge, shall elect no longer to
operate the leased line, it shall be the duty of the lessor at the
end of a period to be fixed by the judge to begin the operation of
such line, unless the judge, upon the petition of the lessor, shall
decree after hearing that it would be impracticable and contrary to
the public interest for the lessor to operate the said line, in
which event it shall be the duty of the lessee to continue
operation on or for the account of the lessor until the abandonment
of such line is authorized by the Commission in accordance with the
provisions of section 1 of the Interstate Commerce Act as
amended."
[
Footnote 8]
Thompson v. Magnolia Petroleum Co., 309 U.
S. 478;
Ex parte Baldwin, 291 U.
S. 610;
cf. Isaacs v. Hobbs Tie & T. Co.,
282 U. S. 734;
Green v. Finnigan Realty Co., 70 F.2d 465, 466;
In re
Chambers, Calder & Co., 98 F. 865.
[
Footnote 9]
§ 77(c)(10).
"The judge may direct the debtor or the trustee or trustees to
keep such records and accounts, in addition to the accounts
prescribed by the Commission, as will permit of such a segregation
and allocation, as the necessities of the case may require, of the
earnings and expenses between and to the divisions and parts of the
railroad or other property of the debtor which are separately
subject to the liens of the various mortgages or deeds of trust, or
are separately subject to lease, and may refer to the Commission
for its recommendations after hearings thereon if the parties shall
so request and/or the Commission determine necessary or desirable,
as to the method or formula by which such segregation and
allocation shall be made, and thereafter such segregation and
allocation may be made at the expense of the debtor's estate."
See note 7
[
Footnote 10]
New York Dock Co. v. The Poznan, 274 U.
S. 117,
274 U. S.
120-121.
[
Footnote 11]
Ibid.
[
Footnote 12]
It may be noted that Congress did not adopt the rule of
Gross v. Irving Trust Co., 289 U.
S. 342, in this situation. In the
Gross case,
property of a debtor had been in the custody of a state
receivership court prior to the debtor's adjudication in ordinary
bankruptcy. It was held that, because of the bankruptcy court's
paramount jurisdiction, the administrative expenses of the
receivership had to be proved in bankruptcy, and could not be
declared a lien by the receivership court on property in its
custody.
[
Footnote 13]
§ 77(e).