215 F.2d 63
ZIRN et al.v.HANOVER BANK et al.
No. 259.
Docket 23000.
United States Court of Appeals, Second Circuit.
Argued June 7, 1954.
Decided July 2, 1954.

Proceedings for the reorganization, under Section 77 of the Bankruptcy Act, 11 U.S.C.A. § 205, of the debtor, New York, Ontario and Western Railway Company, were commenced in 1937. During the 17 years the reorganization proceedings have been pending, no plan of reorganization has been approved by the Interstate Commerce Commission.
In 1945 and again in 1947, the Debtor's trustee obtained aid, in financing the purchase of Diesel-electric locomotives, from the R. F. C. (i e., Reconstruction Finance Corporation) under the provisions of Section 4 of the R. F. C. Act, 47 Stat. 5, as amended 15 U.S.C.A. § 604, which authorized the R. F. C., among other things, to assist railroads financially by purchasing equipment trust certificates where such financial assistance was not otherwise available on reasonable terms. Financial assistance to the Debtor's trustee was effected by the purchase by the R. F. C. of all of the trust certificates issued under two so-called Philadelphia plan type of equipment trusts.
The first is embodied in a Lease and an Agreement, each dated as of May 1, 1945. This 1945 Equipment Trust covers 5 Diesel-electric freight locomotives. Under the 1945 Equipment Trust, $1,695,000 principal amount of trust certificates were issued, of which $918,000 principal amount were outstanding and held by the R. F. C. at the date of entry of the two orders appealed from.
The second equipment trust is embodied in a Lease and an Agreement, each dated as of December 1, 1947. This 1947 Equipment Trust covers 5 Diesel-electric freight locomotives and 21 Diesel-electric switching locomotives. Under the 1947 Equipment Trust, $2,600,000 principal amount of trust certificates were issued, of which $1,795,000 principal amount were outstanding and held by the R. F. C. at the date of entry of the two orders appealed from.
Prior to the creation of each of the Equipment Trusts, the debtor's trustee applied to the District Court in the debtor's reorganization proceedings for authority to enter into the Lease and Agreement, to issue and sell the trust certificates, and to assume the obligations with respect thereto, in order to acquire the locomotives. Notice was duly given as directed by the District Court, to all parties to the reorganization proceedings and to all creditors and stockholders of the debtor. After a hearing, the District Court, without objection from any party in interest, entered orders which approved the form and provisions of the Lease and Agreement and authorized the debtor's trustee to execute and deliver them.
Following the entry of each of these orders, title to the locomotives covered by the respective Equipment Trusts was acquired by The Hanover Bank, as Trustee, and the locomotives were leased to the debtor's trustee upon the terms and provisions set forth in the respective Leases which form a part of the Equipment Trusts. The Leases required the debtor's trustee, among other things, to pay to the Equipment Trustee as rent on each quarterly interest payment date an amount sufficient to pay the interest on all certificates then outstanding and the principal of the certificates maturing on such date.
Ever since 1949, the debtor's trustee has been in default in making such principal payments. He has defaulted in the principal payments on each quarterly interest payment date since August 1, 1949, in the case of the 1945 Equipment Trust certificates. By July 1, 1953, the principal amount of 1945 certificates which had matured but had not been paid aggregated $582,000. The debtor's trustee has defaulted in principal payments on various quarterly interest payment dates since September 1, 1949 in the case of the 1947 Equipment Trust certificates. By July 1, 1953, the principal amount of 1947 certificates which had matured but had not been paid aggregated $625,000. Interest at 3% per annum on all outstanding certificates had been paid.
After the occurrence of the initial defaults, the Debtor's trustee on several occasions negotiated with the R.F.C. concerning the refinancing of the matured trust certificates. Tentative arrangements were worked out at various times, but none of them ever was consummated. In fact, the debtor's trustee failed even to meet the deferred payments required under the proposed refinancing arrangements. Finally, by letter dated May 14, 1953, the R. F. C. advised the debtor's trustee that it rescinded its previous approval of proposed arrangements to refinance the Equipment Trust certificates.
The rights and remedies given to the Equipment Trustee upon a default by the debtor's trustee are typical of those found in any equipment trust issue. The default provisions in the two Leases are substantially the same as are the default provisions in the two Agreements.
The Leases provide that after a default by the debtor's trustee for thirty days or more the Equipment Trustee may declare the Leases terminated and may retake the equipment covered by the Leases and sell the same or any part thereof at public or private sale, for cash or upon credit. The proceeds of any such sale, after payment of the expenses of sale, are to be applied to the payment of all sums required under the provisions of the Leases and Agreements. If any deficiency then remains, the Equipment Trustee is entitled to recover judgment against the debtor's trustee for such deficiency. The Leases also provide that upon demand by the Equipment Trustee, the debtor's trustee will deliver the locomotives covered by the Leases to the Equipment Trustee at a point designated by the latter, or will hold the locomotives for the Equipment Trustee until the latter shall have sold them. It was agreed in the Leases that the performance of this provision was of the essence of the contract and that upon application to any court of equity, the Equipment Trustee should be entitled to a decree against the debtor's trustee requiring the specific performance thereof.
The Agreements provide that upon a default by the debtor's trustee, the Equipment Trustee may, and at the request of the holders of 20% in principal amount of the trust certificates then outstanding, must declare the principal of all of the trust certificates then outstanding to be due and payable. Whether or not the principal of the trust certificates shall have been declared due and payable, the Equipment Trustee, upon written request of the holders of 20% in principal amount of the trust certificates at the time outstanding, is required to take all steps for the performance and enforcement of its rights and the rights of the holders of the trust certificates, and to exercise one or more of the powers of entry, sale or lease conferred upon the Equipment Trustee, or to take appropriate judicial proceedings as the Equipment Trustee, being advised by counsel, shall deem most expedient in the interests of the holders of the trust certificates.
On July 1, 1953, the R. F. C., as the holder of all the outstanding trust certificates, requested the Equipment Trustee to proceed promptly to take all steps for the protection and enforcement of the rights of the Equipment Trustee and of the R. F. C., as the holder of all such certificates as the Equipment Trustee, being advised by counsel, should deem most expedient in the interest of the R. F. C. as the holder of all such certificates. On July 9, 1953, the Equipment Trustee, in accordance with such request and acting pursuant to the terms of the two Equipment Trusts, declared the principal of all of the 1945 Equipment Trust certificates and 1947 Equipment Trust certificates then outstanding and theretofore unmatured to be due and payable immediately.
Since the locomotives covered by the two Equipment Trusts were in the possession and control of the District Court through the debtor's trustee appointed by it, the Equipment Trustee filed a petition, verified July 17, 1953, in the reorganization proceedings, requesting that leave be granted to it to enforce its rights and remedies pursuant to the two Equipment Trusts, to institute and prosecute judicial proceedings to obtain possession of the locomotives described in the 1945 and 1947 Leases, to sell the same, applying the proceeds of sale in accordance with the Equipment Trusts, and to obtain a judgment or judgments against the debtor's trustee for any deficiency or deficiencies.
The debtor's trustee filed a cross-petition requesting the court to deny the relief sought by the Equipment Trustee and to enjoin the Equipment Trustee for a reasonable time from taking possession of the locomotives covered by the two Equipment Trusts or commencing any suit against the estate of the Debtor. A hearing was held on the petition of the Equipment Trustee and the cross-petition of the debtor's trustee on July 29, 1953. At the hearing the Equipment Trustee filed an answer to the cross-petition of the debtor's trustee, and Henry I. Cohen, a bondholder who had intervened in the reorganization proceedings and who is one of the appellants on this appeal, filed an answer to the Equipment Trustee's petition. The debtor's trustee and various other parties requested at the hearing that the debtor's trustee be given time in which to negotiate with the R. F. C. in an attempt to find some way to retain the locomotives covered by the two Equipment Trusts. Acceding to their request and over the strenuous objection of appellee, the District Court adjourned the hearing for 90 days.
Following such adjournment, the debtor's trustee entered into negotiations with the R. F. C. As a result of such negotiations, the R. F. C. agreed to a proposal by the debtor's trustee. In substance, the proposal was that upon the entry by the District Court of an order granting to the Equipment Trustee the relief requested in its petition — i. e., authorizing it to proceed to enforce the rights and remedies given to it under the terms of the two Equipment Trusts — a stand-by agreement would be entered into between the debtor's trustee and the R. F. C. By the terms of the stand-by agreement, the R. F. C. agreed that, as the holder of all of the outstanding trust certificates, it would instruct the Equipment Trustee not to take possession of or sell the locomotives covered by the two Equipment Trusts as long as the payments specified in the stand-by agreement were made prior to the expiration of such agreement on June 24, 1954. The payments which the debtor's trustee was required to make under the stand-by agreement were an initial principal payment of $185,000 and monthly principal payments of $35,000, together with quarterly interest payments at the rate of 3% per annum on the amount of trust certificates outstanding. The payments under the stand-by agreement are in fact somewhat less than those required under the Leases and Agreements.
At the adjourned hearing in the District Court held on October 28, 1953, the debtor's trustee presented a petition, requesting permission to enter into the stand-by agreement with the R. F. C. No further objection was made at the hearing on October 28, 1953 to the granting to the Equipment Trustee of the right to exercise its rights and remedies under the two Equipment Trusts, and no objection was made at that hearing to authorizing the debtor's trustee to enter into the proposed stand-by agreement with the R. F. C., except that Samuel Zirn, a bondholder of the debtor, one of the appellants, objected to the granting of the relief requested in the two petitions.
As a result of the October 28 hearing, the District Court made and entered Order No. 973, granting the relief requested by the Equipment Trustee in its petition. The Court also made and entered Order No. 974-A approving the stand-by agreement, which was executed by the debtor's trustee and the R. F. C. on November 2, 1953.
Appellants Zirn and Cohen have appealed from Orders Nos. 973 and 974-A.
Samuel Zirn, New York City, pro. per.
Nathaniel M. Sokolski, New York City, for Henry I. Cohen, Bondholder-Appellant.
Kelley, Drye, Newhall & Maginnes, New York City (Francis S. Bensel, Hovey C. Clark and Leland J. Markley, New York City, of counsel), for appellee, The Hanover Bank, as Trustee under the Equipment Trusts of 1945 and 1947.
Elbert N. Oakes, New York City, for appellee Ferdinand J. Sieghardt, as Trustee of New York, Ontario and Western Railway Company.
Before CHASE, Chief Judge, and FRANK and HINCKS, Circuit Judges.
FRANK, Circuit Judge.


1
Appellants contend that Smith v. Hoboken R. R. Warehouse & S. S. Connecting Co., 328 U.S. 123, 66 S.Ct. 947, 951, 90 L.Ed. 1123, is "decisive of this appeal." There the debtor railroad, in reorganization-bankruptcy under Section 77 of the Bankruptcy Act, was the lessee of a short-line railroad. The lease, executed long before the bankruptcy, provided, in effect, that the lessor had the power to terminate the lease and re-enter, if the lessee went into bankruptcy-reorganization. The lessor-owner applied to the bankruptcy court for permission to exercise this power, and that court made an order granting such permission. The Supreme Court held the order erroneous for the following reasons: (1) Under Section 77(b) of the Bankruptcy Act,1 a plan of reorganization, which must be formulated by the Interstate Commerce Commission, can modify or alter the rights of creditors of the debtor-railroad and can cure or waive defaults of the debtor under a lease. Since forfeiture of the lease might render a reorganization plan impossible, the forfeiture required the approval of the Commission, and no such approval had been obtained. (2) Section 1(18) of the Interstate Commerce Act2 provides that "no carrier by railroad * * * 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." "Discontinuance of operations by the trustee", said the Supreme Court, "is abandonment of operations by a carrier within the meaning of § 1(18). And a certificate is required under § 1(18), whether the lessee or the lessor is abandoning operations."3 Therefore, absent such a certificate, the order was improper.


2
We think the Smith decision inapposite here. In the first place, the provisions of Section 77(b) have no application to the orders now before us. For, by an amendment enacted in 1935, Congress added to Section 77(j)4 this sentence: "The title of any owner, whether as trustee or otherwise, to rolling-stock equipment leased or conditionally sold to the debtor, and any right of such owner to take possession of such property in compliance with the provisions of any such lease or conditional sale contract, shall not be affected by the provisions of this section."


3
The legislative history shows that Congress, recognizing the substantial benefits to railroads which result from such equipment-agreements, desired to remove any possible doubt — stemming in part from Continental Illinois National Bank & Trust Co. v. Chicago, Rock Island & Pacific Ry. Co., 294 U.S. 648, 55 S.Ct. 595, 79 L.Ed. 1110 — as to the ability of owners of equipment trust certificates promptly, on default, to repossess the equipment, despite the pendency of bankruptcy-reorganization proceedings. See House Report No. 1283, 74th Cong., 1st Session, dated June 21, 1935, accompanying H.R. 8587, which reads in part (p. 4) as follows: "Under the present provisions of section 77, there is doubt whether the trustee under the typical equipment-trust agreement is entitled to the possession of the property insured by the terms of the agreements, it having been urged in some of the pending cases that, under the provisions of section 77, the equipment-trust arrangement must be treated as an ordinary mortgage. If this were done, the investors in the trusts would, consequently, be deprived of the preference intended to be preserved to them by the terms of the agreements, which in form and substance are generally in the nature of contracts of conditional sale. In view of the necessity of readily financing purchases of equipment at a time when the development of the transportation art is providing new forms of equipment, particularly in the passenger field, of which, in interests of efficiency and economy, the carriers should be able to avail themselves, and because after a depression the carriers are usually required to make large expenditures for equipment in order to accommodate the improved traffic, your committee is of the opinion that any doubt should be removed with reference to the validity of the equipment trust as a means of financing equipment purchases. Consequently H.R. 8507 carries an amendment in subsection (j) under which the title of any owner to equipment leased or conditionally sold to the debtor, and any right of such owner to take possession of such property, shall not be adversely affected by the provisions of the section." Senate Report No. 1336, 74th Cong., 1st Session, dated July 29, 1935, on S. 1634, which was the same as H.R. 8587, contained substantially the same language. In the light of these Reports, we think that the words "this section" in the amendment to § 77(j) refers to Section 77 as a whole and not merely to paragraph (j).


4
Moreover, significantly unlike the facts of the Smith case, here The Hanover Bank sought to enforce contracts executed, by the bankruptcy trustee, after the bankruptcy and by the express authority of the bankruptcy-reorganization court. Whether the Smith-case doctrine would govern the lease of a railroad line similarly executed, we need not now decide. But we think that doctrine cannot apply to equipment-trust obligations which the bankruptcy court has authorized.5


5
Nor, all else aside, is 49 U.S. C.A. § 1(18) relevant here. The district court's orders did not permit the railroad or the bankruptcy-trustee to abandon either any part of its "line" or any "operation." To "abandon" in this context means, we think, to give up permanently, not merely to suspend operations for lack of physical equipment. No Commission approval is necessary where the cessation of operations results, not from the volition of the railroad or its bankruptcy-trustee, but from the exercise of the supervening rights, here recognized by the Bankruptcy Act, of third persons. See, e. g., Town of Conway v. Atlantic Coast Line R. Co., 4 Cir., 20 F.2d 250, 259-260.6 Especially in a case like this, if such approval were required before equipment-trust certificate-holders could recapture the equipment on default, the market for such certificates might well dry up, and accordingly railroad reorganization trustees might often be unable to procure needed equipment, with the consequence that suspension of operations would often be accelerated rather than avoided.7


6
Affirmed.



Notes:


1
 11 U.S.C.A. § 205(b)


2
 49 U.S.C.A. § 1(18)


3
 Section 77(o) of the Bankruptcy Act — 11 U.S.C.A. § 205(o) — authorizes the bankruptcy-trustee to sell or abandon lines or other property of the railroad "only with the approval and authorization of the Commission when required by the Interstate Commerce Act."


4
 11 U.S.C.A. § 205(j)


5
 The foregoing discussion will serve to distinguish statements in the following cases cited by appellants: Thompson v. Texas Mexican Ry. Co., 328 U.S. 134, 66 S.Ct. 937, 90 L.Ed. 1132; Palmer v. Commonwealth Massachusetts, 308 U. S. 79, 60 S.Ct. 34, 84 L.Ed. 93; Ecker v. Western Pacific R. Corporation, 318 U. S. 448, 63 S.Ct. 692, 87 L.Ed. 892; Gardner v. State of New Jersey, 329 U.S. 565, 67 S.Ct. 467, 91 L.Ed. 504; Thompson v. State of Louisiana, 8 Cir., 98 F.2d 108; Van Schaick v. McCarthy, 10 Cir., 116 F.2d 987


6
 There it was held that absence of I. C. C. approval constituted no defense in a proceeding by a town to compel a railroad to remove a segment of its track, thus severing its line
Cf. Chamber of Commerce of Demopolis v. Southern Railway Company, 206 I.C.C. 70 (failure of railroad, for lack of funds, to replace a wrecked bridge not an illegal abandonment); Akron & B. B. R. Co., Abandonment of Operation, 239 I.C.C. 250, 254.


7
 Although not the basis of our decision, we note the following in passing: (1) That the railroad is still operating goes to show that the orders did not authorize abandonment. (2) The bankruptcy-trustee stated that, if deprived of the diesel-electric locomotives, he can continue to operate by leasing steam locomotives
We are not to be understood as indicating that, considering this railroad's prolonged grave financial condition and the failure to work out a reorganization plan, the court below should not soon direct the bankruptcy trustee to seek I.C.C. approval of abandonment of operation. Cf. Bankers Trust Co. v. Gebhart, 2 Cir., 195 F.2d 238, 240.


