Court Opinion

ID: 9458405
Source: CourtListenerOpinion
Date Created: 2023-08-04 20:51:20.610233+00
Date Added: 2024-06-11T17:35:45.342302
License: Public Domain

WEICK, Circuit Judge
(dissenting).
This case is important to over $1,200,-000 of creditors in railroad reorganization proceedings under Section 77 of the Bankruptcy Act, creditors whose priority claims were subordinated to the claim of the United States by the Court’s opinion which reversed a judgment of the District Court1 to the contrary. The case involves construction of the priority provisions of the Act, of the Reconstruction Finance Corporation Act as amended,2 the applicability of R.S. § 3466, and the effect of the abolishment of R.F.C. and the repeal of statutes creating it.
Without question, the priority claims of the creditors were superior to the loan of R.F.C. which was secured by pledge of an issue of First Mortgage 4% Bonds. The United States claimed, however, and the Court held, that because of the abolishment of R.F.C. and repeal of the statutes many years after the loan was made, the Government need not look to the lien of its mortgage bonds, but could claim priority under R.S. § 3466, which the Reconstruction Finance Corporation Act, as amended, (and prior to its repeal) provided was inapplicable.
The Court’s opinion is based entirely on dicta in United States v. Key, 397 U.S. 322, 90 S.Ct. 1049, 25 L.Ed.2d 340 (1970); but Key involved a different type of proceeding, namely, a corporate reorganization under Chapter X of the Bankruptcy Act, rather than a railroad reorganization proceeding under Section 77, such as was involved in the present case. Counsel even question the validity of the dicta, pointing out that the court on page 330, 90 S.Ct. 1049, 25 L.Ed.2d 340 quoted Section 77(e), as it existed prior to the Act’s amendment in 1935, when the statute was rewritten entirely and drastically changed.
There is nothing in the Court’s opinion to indicate that it considered amended section 77.
Furthermore, Key involved a tax claim of the United States. Our case, unlike Key, involved a loan made by R.F.C. to the railroad, which loan was secured by a pledge of $6,216,000 of First Mortgage 4% Bonds. At the time the railroad went into reorganization it owed the Government on the loan .$4,571,000 in principal, and $461,731.13 in interest.
The statute creating R.F.C. granted it power to sue and to be sued, and expressly provided:
“Debts due the Corporation, whether heretofore or hereafter arising, shall not be entitled to priority available to the United States pursuant to section 191 of Title 31 (R.S. 3466) ...”
In Reconstruction Finance Corp. v. J. G. Menihan Corp., 312 U.S. 81, 61 S.Ct. 485, 85 L.Ed. 595 (1941), the Court refused to treat RFC as the United States, holding that costs could be assessed against it the same as against any other litigant.
R.F.C., however, was abolished in 1957 pursuant to provisions of the 1949 Reorganization Act (Ch. 226, p. 203) and Reorganization Plan No. 1 of 1957 (22 F.R. 4633, 71 Stat. 647), and its assets were transferred to the Secretary of the Treasury. See also 15 U.S.C.A. §§ 601 and 603 notes.
It was not until nine years later that Congress enacted the Omnibus Reorganization Act repealing hundreds of obsolete statutes, only part of which related to the RFC. We are asked to infer therefrom that Congress intended to restore priority of the United States, thereby displacing the lien of existing mortgage indebtedness of RFC, to the prejudice of priority creditors. It is not believed that Congress intended to do any such thing.
In my opinion, to grant the United States priority would conflict with two *83decisions of the Supreme Court which held that claims of the Government for money loaned to railroads during federal control, were not entitled to priority. United States v. Guaranty Trust Co., 280 U.S. 478, 50 S.Ct. 212, 74 L.Ed. 556 (1930), and Mellon v. Michigan Trust Co., 271 U.S. 236, 46 S.Ct. 511, 70 L.Ed. 924 (1926).
The purpose of the RFC loans to railroads was to keep the railroads in operation, to rehabilitate them, and to preserve the existing transportation system. It was a public purpose. This was also the purpose of the Railroad Reorganization Act (Section 77). The statute creating RFC provided specific means to insure repayment of loans other than the priority provision of § 3466. These means were strictly followed in the present case by a pledge of First Mortgage 4% Bonds to secure the loan.
While there was no express provision in the federal control statutes excluding indebtedness to the Government from the operation of § 3466, the Court held in United States v. Guaranty Trust Co., supra, 280 U.S. 478, 50 S.Ct. 212, 74 L.Ed. 556 that Congress intended such exclusion. The Court said:
“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. The interest rate required 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, 240 [46 S.Ct. 511, 70 L.Ed.2d 924]” (Id. at 485-486, 50 S.Ct. at 214).
It is clear that railroads cannot operate without credit. The credit is necessary to obtain labor, materials and interline accommodations with other railroads; without such credit operations would cease.
It further appears from the record that RFC, as well as the Secretary of the Treasury, permitted the railroad to operate when they both knew that in so doing the railroad was incurring debts and losing substantial sums of money. By the continuous operation the mortgage security of the Government was preserved, and the trustee in the reorganization proceeding was enabled to sell the railroad as a going concern and without interruption of service to the public. The Government here was entitled to treatment no different than that accorded to any other secured creditor.
Equitable principles which are applied in creating priority liens of creditors under Section 205 for credit furnished within a period of six months prior to the reorganization proceeding, should be adhered to. Southern Ry. Co. v. Carnegie Steel Co., 176 U.S. 257, 20 S.Ct. 347, 44 L.Ed. 458 (1900); Burnham v. Bowen, 111 U.S. 776, 4 S.Ct. 675, 28 L.Ed. 596 (1884); Miltenberger v. Logansport, C & S W Ry., Co., 106 U.S. 286, 311, 1 S.Ct. 140, 27 L.Ed. 117 (1881); Southern Ry. Co. v. Flournoy, 301 F.2d 847 (4th Cir. 1962).
Reliance upon cases such as United States v. Emory, 314 U.S. 423, 62 S.Ct. 317, 86 L.Ed. 315 (1941) and Small Business Adm’n v. McClellan, 364 U.S. 446, 81 S.Ct. 191, 5 L.Ed.2d 200 (1960), involving commercial loans to private individuals, is misplaced. There was no *84statute involved in these cases which excluded the operation of § 3466, or facts from which an intent on the part of Congress to exclude operation of § 3466 could possibly be inferred.
Nor was there involved in these cases a comprehensive scheme of Congress, as is evidenced by the Railroad Reorganization Act, to keep railroads in operation and to provide means for their rehabilitation which could be frustrated if the railroad’s ability to obtain credit from private sources is impaired.
Substantial questions are presented in the appeal, and I respect the views of my colleagues. I would grant the rehearing and determine priorities excluding the operation of § 3466.

. 316 F.Supp. 1103 (M.D.Tenn.1970).

. 15 U.S.C. § 603.