The opinion of the court was delivered by: AUGELLI
The operative facts are not in dispute. By order (No. 1), dated March 22, 1967, this Court approved the petition for reorganization filed by the Debtor under section 77 of the Bankruptcy Act (11 U.S.C.A. § 205). Perry M. Shoemaker and John E. Farrell were appointed trustees, and duly qualified as such. Their petition for relief was filed on June 7, 1967, and a hearing thereon took place on June 26, 1967.
The record discloses that the Debtor, in the regular course of its business as a railroad carrier engaged in interstate commerce, interchanges freight shipments with other railroads, including NYC. These operations, involving interchanges of freight movements over the lines of several railroad companies, give rise to so-called interline freight balances which are settled among the participating carriers in accordance with rules promulgated by the American Association of Railroads (AAR).
In the ordinary conduct of railroad business, most freight shipments are made on a "collect" basis. The "terminal" or "settling" carrier collects the total freight charges from the consignee. Thereafter, by means of debit or credit entries, or the exchange of drafts, as the case may be, settlement is made with all railroads connected with the particular movement. For example, a carload of freight originating in California, and terminating at the facilities of the Debtor in Jersey City, would result in the collection by the Debtor of the freight charges from the consignee. As the "terminal" or "settling" carrier, the money so collected by the Debtor would then be allocated, proportionately, among the railroads which participated in the freight movement from West to East.
The proof in this case is uncontradicted that this method of settling interline freight balances is followed by all railroads. And the proof is likewise uncontradicted that the money collected by any "terminal" or "settling" carrier in connection with the movement of freight in which other railroads have participated, is treated by such "terminal" or "settling" carrier as funds of its own. There is no segregation of the money to reflect what portion thereof may ultimately be payable to a participating railroad, nor are the funds earmarked in any way. The money so collected by the "terminal" or "settling" carrier is deposited in such carrier's general bank account and used for general corporate purposes. NYC makes a point of the fact that funds representing interline freight balances are not carried on the books or records of the "terminal" or "settling" carrier as "operating income". The reason for this is obvious, but in any event, such fact can have no legal significance in the resolution of the issues here involved.
The treatment accorded interline freight balances by NYC does not, as already indicated, differ from the practice followed by all other railroads. NYC deposits the money so collected in its general bank account, commingles it with other corporate funds, and uses the same in its day to day business operations. The money is not earmarked, nor is it segregated for the benefit of any particular railroad that participated in the movement giving rise to the freight revenue. Indeed, NYC deposits such funds in "short-term loans, government securities, [and] things of that nature", keeping the increment earned thereon as its own. It is crystal clear from the testimony in this case that until such time as the AAR rules require the presentation or exchange of drafts for settlement of these interline freight balances, all "terminating" or "settling" railroads treat such funds as their own, and use the same for general corporate purposes, subject only to the duty to account therefor to participating carriers at a specified time. This is the manner in which railroads deal with each other under normal conditions in the settlement of their interline freight balance accounts.
However, when a railroad, such as the Debtor in this case, becomes involved in financial difficulties, other carriers doing business with the "sick" railroad may put it on a "cash" or "prepay" basis, and that is what was done here by NYC. It is undisputed that during the months of February and March, 1967, interline freight balances between the Debtor and NYC reflected a credit in favor of the latter to the extent of $132,073.84. Because of the Debtor's financial condition at that time, no part of these interline freight balances, which had accrued prior to the filing of the reorganization petition on March 22, 1967, were paid, and the same remain unpaid to this day.
On March 22, 1967, this Court entered an order in the reorganization proceedings, paragraph 9 of which reads as follows:
"All persons, firms and corporations, holding collateral heretofore pledged by the Debtor as security for its notes or obligations or holding for the account of the Debtor deposit balances or credits be and each of them hereby are restrained and enjoined from selling, converting or otherwise disposing of such collateral deposit balances or other credits, or any part thereof, or from off-setting the same, or any thereof, against any obligation of the Debtor, until the further order of this Court."
A copy of this order, containing the above quoted provision, was duly served on NYC or its counsel, Mr. Shapiro.
Effective March 27, 1967, NYC published in Leland's Official List of Open and Prepay Stations, I.C.C. A-46, a tariff, controlling on all railroads, which required that all shipments originating or passing over NYC lines for destination on the Debtor's lines would be on a "prepay" basis, and that all shipments originating on Debtor's lines and moving over or terminating on NYC lines, would be on a "collect" basis. As a result of this tariff, NYC has been collecting and is holding, charges for freight shipments which originated or terminated on the Debtor's lines. As to freight that terminated on the Debtor's lines, the charges for such shipments represent funds which, in accordance with established practice and custom, would normally have been collected by the Debtor and retained and used by its trustees until such time as settlement drafts with respect to said interline freight balances were required to be exchanged with connecting carriers within the time and in the manner prescribed by the AAR rules. Such settlements usually take place on the 18th day following the month of the freight shipment or shipments involved. Generally speaking, however, settlements are effected, by the exchange of drafts, between the 20th and the 25th day of the month following the movement.
As a result of interline freight movements that occurred during the month of April 1967, NYC, under the tariff filed by it on March 27, 1967, collected the freight charges for all participating carriers, including the Debtor, involved in said movements. The Debtor's proportionate share of the money so collected by NYC amounted to $266,858.96. On May 24, 1967, the trustees presented a draft for that amount to NYC, which declined to accept it. Instead, NYC offered to honor a draft only to the extent of $134,785.12 (which figure was later corrected to $137.068.26), and represented the difference between the ...