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New York Trust Co. v. New York & Greenwood Lake Ry. Co.

decided: July 17, 1946; As Amended July 23, 1946.


Author: Mclaughlin


McLAUGHLIN, Circuit Judge.

This appeal brings up for review an order of the United States District Court of the District of New Jersey entered April 26, 1945, dismissing a petition by plaintiff and its counsel for a determination and allowance of the reasonable value of services rendered the defendant.

On May 1, 1896, the defendant delivered to the plaintiff as trustee, its prior lien mortgage deed as security for the issuance by the defendant of $1,500,000 limited amount of its prior lien 5% bonds due May 1, 1946. The deed conveyed to the plaintiff in trust all of defendant's property and provided for the usual remedies in case of default on the bonds or of any of the covenants of the mortgage. The clause stressed by appellant reads, in part: "Article XVIII * * * the Trustee and its agents, attorneys and counsel shall be entitled to a reasonable compensation for all services rendered in connection with the trusts hereby created or in pursuance of the provisions of this Indenture. The Railway Company [defendant herein] agrees to pay to the Trustee such compensation and, also, all expenses reasonably incurred by the Trustee hereunder, and the Trustee shall have a lien therefor upon the mortgaged property and the proceeds thereof."

Simultaneously with the delivery of its mortgage, defendant leased all of its property to the Erie Railroad Company for a period of 999 years, the lease providing that Erie had the right and duty to operate defendant's property for the full period contemplated by that instrument. Erie agreed to pay the principal and interest of defendant's bonds to be issued under the mortgage and the outstanding obligations of defendant other than its bonded indebtedness. The defendant assigned all of its rights as lessor in the lease to plaintiff as additional security for its bonds and the plaintiff as trustee of the mortgage and assignee of defendant's lessor rights under the lease was granted full powers to enforce all of defendant's rights against Erie. The defendant thereupon executed and the plaintiff authenticated and delivered a principal amount of $1,493,900 of defendant's prior lien bonds, each of which bore Erie's endorsed guaranty of principal and interest. Erie then took possession of and operated defendant's property until the year 1938.

On January 18, 1938, Erie, which at the time owned 89.4% of defendant's capital stock, filed a petition to reorganize under Section 77 of the Bankruptcy Act, 11 U.S.C.A. ยง 205, in the United States District Court, Northern District of Ohio, Eastern Division (hereinafter called the Erie Ohio Court). The petition was granted and trustees for Erie appointed. Plaintiff promptly intervened in that action to protect defendant's lessor rights and the rights of defendant's bondholders. In the course of those proceedings the Erie Ohio Court awarded plaintiff and its counsel several bankruptcy allowances from the Erie estate, based upon that portion of their services which pertained to the Erie proceeding. That there allowances were so predicated was found as a fact by the District Court below.

On December 30, 1940, the Erie Ohio Court approved a Plan of Reorganization for Erie, which made specific provision for Erie's debts and securities, including general claims against Erie. No provision was made for the Greenwood Lake Company bonds, for the latter company was not in reorganization and its bonds were the direct obligation of the present defendant. However, Article O of the Plan gave the Erie Reorganization managers the power to negotiate for the acquisition by Erie of the securities or physical properties of any of its subsidiary lessor corporations.

During the year 1941 the Erie managers unsuccessfully negotiated with a group of Greenwood Lake bondholders for an exchange of new Erie preferred stock, par for par, for the bonds. On December 12, 1941, the Erie trustees rejected the Greenwood Lake lease, and on December 18 of the same year they elected to cease operating the latter's property and to reject Erie's guaranty of the Greenwood Lake bonds. Those decisions were approved by the Erie Ohio Court Order No. 385, filed on December 18, 1941.

Since December 22, 1941, the Erie Railroad Company has been operated by its own board of directors free of control of the Erie Ohio Court. The "Closing Order" of the Ohio Court (dated December 20, 1941) reserved jurisdiction over the exercise by the Erie Reorganization managers of their powers under Article O of the Reorganization Plan, regarding reorganization expenses, claims arising out of rejected executory contracts and certain other matters.

On December 24, 1941, plaintiff filed its bill for foreclosure in the Court below, alleging that no interest had been paid on defendant's bonds since 1938, when Erie entered bankruptcy. Pursuant to plaintiff's application, the District Court appointed receivers of defendant's property on January 21, 1942, and authorized said receivers to take control of and operate defendant's properties on March 5, 1942. The Erie Railroad Company thereafter offered defendant's bondholders the opportunity of exchanging their bonds for new Erie securities and cash, or for cash only. Over a period of years Erie in this way acquired about $1,346,800 principal amount of defendant's bonds, plus $101,700 principal amount of bonds in the open market, leaving a balance of $23,100 face amount of bonds unacquired.

The defendant obtained permission of the Court below to delay the filing of its answer to the foreclosure petition until the outcome of its offer of exchange had been determined. Then on April 3, 1944, the defendant filed its answer, admitting the allegations in the bill except as to interest rates and offering to satisfy its obligations under the mortgage. On April 3, 1944, after hearing, the Court below terminated the action with the decree reciting that there were pending claims "on behalf of the plaintiff against the defendant for the reasonable value of services rendered by it and its counsel and expenses incurred in the administration of the trust estate under the Mortgage * * *." Article VII of the decree reads: "The determination of any claims of the plaintiff for the reasonable value of its services and expenses incurred in the administration of the trust estate under the Mortgage, including the services and expenses of its counsel in connection therewith, and the costs and allowances of this action, and any claims of the Receiver for a final allowance and reimbursement of his expenses, are hereby reserved without prejudice for further order of the Court. Such claims as hereafter determined shall thereupon constitute a part of the Mortgage indebtedness due from defendant to plaintiff and shall constitute valid and subsisting liens on the mortgaged premises."

On April 28, 1944, plaintiff and its counsel filed their petition asking allowances for the value of their services and for expenses, in connection with the trusts created by the mortgage. The Court dismissed the petition, and from that dismissal this appeal is taken.

The District Judge found, inter alia, that "* * * any obligation to pay any allowances for reasonable compensation under Article XVIII of said mortgage, became and now are, obligations of the reorganized Erie Railroad Company, and are subject to the reserved jurisdiction of the Interstate Commerce Commission to determine and fix the maximum limits, and of the Ohio Court to order the payment, of any such allowance, out of the Erie estate." In refusing to take jurisdiction of the petition, the lower Court held that "* * * the bankruptcy court is paramount. This court is without authority to grant the prayers of the petition filed herein and the petition therefore is dismissed."

The substantial problem on this appeal is which of the two District Courts (Ohio and New Jersey) has authority to pass upon the fees requested. The Erie system, in which the Court below in effect held that the defendant railway is included, has been reorganized in a Section 77 proceeding in the Ohio Court with the latter still retaining control of the matter. The validity of the New Jersey District Court's assumption of jurisdiction in the foreclosure action itself was never challenged. Appellant, urging that the latter tribunal has jurisdiction over defendant's obligation under Article XVIII of the mortgage, states that there is no provision in Section 77 of the Bankruptcy Act giving the Bankruptcy Court authority over a subsidiary of the debtor unless a petition for reorganization is also filed by the subsidiary under Section 77, sub. a.*fn1 It asserts that the Ohio Erie Reorganization is entirely different from the New Jersey foreclosure of defendant's mortgage and contends that since the defendant is a separate corporation it cannot be brought under the Erie reorganization as no bankruptcy petition has been filed by or for it. In justification of this proposition are cited In re Reorganization of Pittsburgh Rys. Co. (Philadelphia Co. v. Dipple), 3 Cir., 111 F.2d 932, affirmed 312 U.S. 168, 61 S. Ct. 538, 65 L. Ed. 651, and In re Pittsburgh Rys. Co., D.C.W.D.Pa., 60 F.Supp. 600. The Dipple case turned on a question not material to the issue before us. In re Pittsburgh Rys. Co., which is relied on heavily, is in point, and the opinion of the District Court did give strong support to the appellant's proposition. The decision of the District Court, however, has now been reversed by this Court, In the Matter of Pittsburgh Railways Co., 155 F.2d 477, 485. In that case a number of separate corporations operating under a single company since 1902, comprised the City of Pittsburgh ...

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