Opinion ID: 314156
Heading Depth: 1
Heading Rank: 2

Heading: freight and passenger accounts

Text: 16 Freight and passenger charges are collected by the originating or destination carrier for services performed by the Interlines. Under the AAR rules, instead of separately paying each carrier that participates in an interline shipment, the shipper pays all freight charges to either the originating carrier when the shipment is prepaid or to the destination carrier on collect shipments. Funds collected are deposited in the collecting carriers' general accounts. The interline railroads make numerous collections for each other daily which are segregated and settled monthly. No interest is paid by the collecting carrier for the period it holds another carrier's revenue. 17 The destination railroad is responsible for preparing and settling interline freight accounts. It prepares an abstract on which the appropriate freight charges are allocated to the participating carriers. It then not later than the eighteenth of the succeeding month sends copies of the abstract to the other carriers. 6 The carriers may then immediately draw a draft on the destination railroad for the net balance due for the month. The destination carrier must include in the monthly accounting all charges for which the destination carrier has received a waybill, whether or not the shipper paid. The waybill is issued by the originating carrier and prescribes the movement of the shipment and charges. The charges which Penn Central has not paid in the instant case represent May 1970 freight services; Penn Central declined drafts submitted on or after June 22, 1970, of approximately $15 million for these accounts. 18 Passenger accounts are handled similarly. The monthly reports, however, are not required until the last day of the first month following the service. Net passenger balances also are subject to immediate draft upon receipt of the statements. Penn Central has declined drafts submitted on or after July 1, 1970, for approximately $280,000 for May traffic. 19 The AAR interline accounting system is in essence, therefore, a system by which one railroad collects monies owed by shippers to both itself and other railroads. The monies collected belong only in part to the collecting railroad; as to monies owed other railroads, the collecting railroad serves merely as a receiving and transmitting agent. A common sense interpretation of this system would indicate that funds collected by one railroad for and in behalf of another railroad are held in trust by the collecting railroad until the monies are transmitted. Whether the money is held in trust must be determined, however, not merely by reliance on common sense, but also by application of traditional legal doctrines. We therefore turn to the law of trusts to make that determination. In applying the law of trusts, it will be necessary to examine the manifestation of intent of the parties, not only in terms of written documents, but also in terms of the conduct of the parties. Especially important in the present case are (1) the absence of any payment of interest on monies collected during the time they are held by the collecting railroad, and (2) the commingling of the monies with general funds by the collecting railroad. 20 Accommodating and applying traditional common law trust principles to the unique regulatory scheme and accounting policies used by the nation's railroads, we have concluded that transportation and freight charges, when collected, are held in trust for the Interlines. They are therefore entitled to have their monies. 21 A trust is defined in Restatement (Second) of Trusts Sec. 2 (1959) as: 22 [A] fiduciary relationship with respect to property, subjecting the person by whom the title to the property is held to equitable duties to deal with the property for the benefit of another person, which arises as a result of a manifestation of an intention to create it. 23 The parties' manifestation of intention ultimately controls whether or not a trust relationship exists, but failure to expressly designate the relationship as one of trust does not necessarily negate its existence. See United States v. Orsinger, 138 U.S.App.D.C. 403, 428 F.2d 1105, 1112 (1970); Del Drago v. Commissioner, 214 F.2d 478, 480 (2d Cir. 1954); State v. United States Steel Co., 12 N.J. 51, 95 A.2d 740, 744 (1953); 1 A. Scott, Law of Trusts Sec. 2.8 (1967). When the language of the parties fails to clearly indicate their intention, it may be ascertained by other objective manifestations of intent, such as the facts and circumstances surrounding the transaction and the relationship of the parties. Stratford Financial Corp. v. Finex Corp., 367 F.2d 569, 571 (2d Cir. 1966); In re Chicago Express, Inc., 222 F.Supp. 566, 572 (S.D.N.Y.1963); 1 A. Scott, supra, Sec. 12.2, at 108. 24 A significant fact in the instant case warranting careful consideration is the absence of any provision for the payment of interest by the collecting carrier. Although not conclusive, its absence indicates the presence of a trust relationship. See United States v. Orsinger, supra; State v. Atlantic City Electric Co., 23 N.J. 259, 128 A.2d 861, 865-866 (1957); State v. United States Steel Co., supra. A debtor-creditor relationship entails the right to use another's money, the usual quid pro quo for which is the obligation to pay interest. See 1 A. Scott, supra, Sec. 12.2, at 108. Conversely, the collection by Penn Central as an agent of money due and owing the other railroads suggests a trust. See, e. g., In re Chandler Insurance Agency, Inc., 92 F.Supp. 878 (D.Md. 1950); National Indemnity Co. v. American National Bank, 120 F.Supp. 713 (D.Minn.1954), aff'd, 222 F.2d 513 (8th Cir. 1955); Restatement (Second) of Trusts Sec. 12, comment h (1959). 25 On the other hand, appellee trustees argue forcefully that the Interlines, by permitting Penn Central to commingle monies due them with Penn Central's general revenues, established a debtor-creditor relationship and not a trust. While generally commingling indicates a debtor-creditor relationship and not a trust, it is only one indicium and it too is not necessarily conclusive. See National Bank v. Insurance Co., 104 U.S. 54, 68, 26 L.Ed. 693 (1881); MacBryde v. Burnett, 132 F.2d 898, 900 (4th Cir. 1942); State v. United States Steel Co., 12 N.J. 51, 95 A.2d 740, 744 (1953). 26 Commingling of monies has minimal significance in the extraordinary operations of interline railroads. That Penn Central is not, as a destination carrier, required by the other carriers to immediately segregate funds collected does not necessarily reflect any intention to establish a debtorcreditor relationship in the face of the unique and complex interline railroad system. Normal operation conditions with innumerable daily collections of various categories preclude practically and economically any effective daily segregation. Burlington Northern Railway alone has more than 1300 stations from which waybills are issued. 7 This is not a simple situation of one party receiving money clearly designated as payment for services performed by another. When a carrier collects funds for another railroad, it does not immediately know what portion of the revenues collected is to be allocated to other carriers. 27 Mr. Hill, Penn Central's Vice-President-Comptroller, testified that Penn Central settles regularly with more than 300 interline carriers. Settlement involves calculating amounts due each carrier for many different waybills sent daily to Penn Central. We recognize the enormous difficulties confronting the destination carrier to correlate each of these waybills with payments received on a monthly basis, not to mention daily basis, and to segregate funds received according to the waybills. 28 AAR rules merely serve to evidence the necessities of the situation. To accommodate the carriers in this exceedingly voluminous and complicated accounting system, the AAR rules require that the statements be rendered only once each month and give the carriers 18 days to prepare the abstract of the interline freight accounts after the end of the month in which the waybill is received. The rules also indicate the difficulty in segregation of collections. They require that accounts may be drawn on the collecting carrier after the specified period even though in some instances the charges have not yet been collected from the shippers. 8 29 Each party in this controversy finds support for its position in a number of cases that specifically concerned interline accounts. Although we think none are directly in point with this case, 9 none rebut our conclusion that the freight and transportation collections are held in trust. 30 In Southern Railway Company v. United States, 306 F.2d 119 (5th Cir. 1963), the court refused to accord priority to interline claims of the Southern Railway against the receiver of the Tallulah Falls Railway Company for amounts earned by Southern or paid by Southern to other carriers and collected by the receiver. According to the court, the freight payment first became in arrears in June 1958, and the receiver repeatedly advised Southern that it was unable to make the payments. Nonetheless, Southern made no demand for segregation of monies collected for it until May 1960. The court declined on a laches theory to accord the interline claims priority. It reasoned that Southern knew of the precarious financial situation of the railroad in receivership but continued to disburse its own funds to prior connecting carriers with a full awareness that the funds were not being reimbursed by the Receiver and that, as with routine day-to-day operating charges, the Receiver was using its money, its supplies, and its facilities on which to run the Railroad. Id. at 125. 31 The Interlines in this case, however, were not guilty of such folly. They began demanding payment within three days of filing the reorganization petition. Southern Railway, moreover, does contain dictum indicating that, aside from the laches problem, the court indicated the funds collected acquired a trust character at the time the accounts were presented. 10 The court stated: 32 The Receiver had a right to collect and to retain. The duty to remit was limited to the balance when and as struck in the periodic settlements. Only then did funds, rightfully collected and mingled, acquire a trust character. 33 306 F.2d at 125. Applying this statement to the case sub judice, the freight accounts for the month of May 1970 acquired a trust character when stated on June 18, 1970. 34 In re Chicago Express, Inc., 222 F.Supp. 566 (S.D.N.Y.1963), aff'd, 332 F.2d 276 (2d Cir. 1964), cert. denied, 379 U.S. 879, 85 S.Ct. 146, 13 L.Ed.2d 86 (1964), involved a claim by the Pennsylvania Railroad Company for priority in the bankruptcy of a trucking company. By agreement, Pennsylvania carried trailers of the motor carrier piggyback on flat cars. Pennsylvania's charges for this service depended on several variable factors, including the number of trailers transported during a given month, the weight of the trailers, and the distances traveled. The railroad's charges were not related to the trucker's charges to its customers; the Pennsylvania made no inquiry into customer charges. The trucking company was obligated to pay within 15 days from the date of billing by Penn Central. This 15-day period was referred to by the parties in their rate agreement as a credit accommodation and was subject to suspension if payment was not timely. In rejecting the Pennsylvania's argument that proceeds received by the trucker from its shippers to the extent attributable to piggy back hauls constituted trust funds held for Pennsylvania, the court explained, 35 The following are some of the facts which lead me to conclude, as did the Referee, that the relationship between the parties here was one of creditor and debtor, and not trustee and beneficiary: the absence of an agreement between the Pennsylvania and the Debtor to apportion total charges; the lack of relationship between the amount due the Pennsylvania from the Debtor and the overall charge made by the Debtor to its customer; the unconditional duty of the Debtor to pay freight charges to the Pennsylvania within fifteen days from the day of billing, and the credit accommodation clause in the divisional sheet. 36 222 F.Supp. at 572. 37 These facts in Chicago Express clearly differentiate it from the case sub judice. Penn Central did have an arrangement with the Interlines to apportion total charges; the amounts received by the Interlines were directly related to and dependent upon charges paid by shippers; and the amounts owed to the Interlines were payable immediately upon striking the monthly settlement. 38 Penn Cental argues, however, and the district court agreed, that this issue was previously settled in In Re Central Railroad of New Jersey, 273 F.Supp. 282 (D.N.J.1967), aff'd per curiam, 392 F.2d 589 (3d Cir. 1968). It is true that in that case the district court held that the New York Central Railroad Company (NYC) could not set off amounts it owed the Central Railroad of New Jersey (Central) for post-reorganization freight transportation against amounts owed by Central to it for pre-reorganization freight transportation by NYC. In reaching that result, the court concluded that the amounts collected by Central for NYC's interline service were not trust funds. 273 F.Supp. at 288. We affirmed by a per curiam opinion. To the extent the Central Railroad decision is inconsistent with the case sub judice, it should not be followed. 39 The concurring opinion expresses concern because of our reliance upon established principles of trust law which may in some future case, when possibly the traditional indicators of a trust relationship are absent, require a contrary holding and thus might disrupt interline railroad transportation. The principal problem before us is one of accounting for funds belonging to another, readily resolvable by recognized trust and pragmatic considerations to which we have alluded. These principles are appropriate to any industry, regardless of their operational problems, and our decision supports the congressional policy encouraging interline rail transportation of freight and passengers nationwide. We perceive no need to announce an entirely new and necessarily result-oriented rule of law which is not pertinent to our present decision, merely because of the fear that the traditional approach may be restrictive in some future unstated hypothetical situation.