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In re Central R. Co.

decided: July 15, 1947.


Author: Mclaughlin

Before GOODRICH, McLAUGHLIN and KALODNER, Circuit Judges.

McLAUGHLIN, Circuit Judge.

This appeal concerns another phase of a matter long in litigation. The past history of it is summarized in a previous decision of this court reported at 3 Cir., 152 F.2d 408, 411, affirmed in part and reversed in part sub nom Gardner, Trustee of the Central Railroad of New Jersey, v. State of New Jersey, 329 U.S. 565, 67 S. Ct. 467. Some of the facts relevant here have been reported earlier; but those necessary will be set down regardless of that, in order to present the current question in an orderly way.

During the last two decades, New Jersey and the railroads operating within its borders have been at odds about taxation. Most of those railroads were in arrears in tax payments and some of them were in bankruptcy. The debtor here is one such railroad. In connection with this situation and after bitter controversy New Jersey enacted two statutes known as the Settlement Acts. The first of these, c. 290, P.L. 1941, p. 768, provided for payment by installments of previously delinquent railroad taxes. It forgave interest theretofore accrued and set up a new, lower rate of interest on installments to be paid. It waived other methods of the state for collection. It required waivers by the taxpayers of objections and suits contesting previous levies, the filling out of forms and the following of fixed procedures. Approval of the forms used was required of the State Attorney General. The railroads attempted to comply with the Act, but the Attorney General refused to approve the necessary forms.Drawing forms of their own, the railroads filed them together with installment payments at the office of the State Treasurer. Finally, the Attorney General brought an information in the New Jersey Court of Chancery to test the Act under the state constitution, and he secured a temporary restraint against the State Treasurer. The second Settlement Act, c. 241, P.L. 1942, p. 651, amended the title and body of the first, altering the method and nature of the provisions in a manner not here pertinent, and adding a few new provisions. On the very day of its enactment, Chancery extended its injunction of the first Act to include the second as well. The debtor here nonetheless made some vain effort to comply with the terms of the New Act.

In Wilentz v. Hendrickson, 133 N.J.Eq. 447, 33 A.2d 366, Chancery held both Settlement Acts were invalid and permanently enjoined compliance with them by the State Treasurer, the only named defendant in the case. The pertinent provisions of the final decree invalidating the Settlement Acts are as follows:

"1. That Chapter 290 of the Laws of 1941 and Chapter 241 of the Laws of 1942 are in contravention of Article I, Section 20, of the Constitution of the State of New Jersey [N.J.S.A.], and are null and void.*fn1

"2. That the defendant, Robert C. Hendrickson, State Treasurer, his successors in office and his and their respective agents and servants, be and they are hereby each, severally, permanently restrained and enjoined from carrying out or executing any and all of the provisions of Chapter 290 of the Laws of 1941 and of Chapter 241 of the Laws of 1942, and from accepting from any railroad taxpayer any acceptance documents, discharges or dismissals, discontinuances, checks or other forms of payment which may be delivered to him or them or which were heretofore delivered to him or them in purported compliance with Chapter 290 of the Laws of 1941 and Chapter 241 of the Laws of 1942, and from depositing any such checks or other forms of payment or distributing the proceeds thereof."

This decision was affirmed on its own reasoning and that of the Court of Errors and Appeals. 135 N.J.Eq. 244, 261, 38 A.2d 199.

Thereafter the debtor petitioned the Bankruptcy Court, in which it had been for some time for reorganization, to ascertain its status and obligations toward the state following the events above outlined. The debtor desired to know if the voiding of the Settlement Acts applied to it and if its attempted compliance with those Acts spelled out the execution of a contract with the state. By its order 250 the reorganization court appointed a master to ascertain a number of matters in the reorganization, including, by implication, power to recommend answers to the above problems. To this order the State Attorney General took exception. Representing New Jersey as a creditor for taxes in the debtor's reorganization, he petitioned for a stay against the master until a state court had passed upon the questions and for permission to bring those questions before that court. The reorganization court denied this petition.

The appeal from that denial, which is now at bar, was kept pending during the determination by the Supreme Court in the Gardner case, supra. Justice Douglas, speaking for that court in the Gardner opinion said, concerning this appeal, at page 582 of 329 U.S., at page 476 of 67 S. Ct.:

"This controversy is now in a different posture. New questions of local law emerge - whether Wilentz v. Hendrickson, supra, controls this case; whether a valid settlement can be made under an unconstitutional act and, if so, whether this alleged compromise was valid and effective; whether, if the settlement was not binding, the amount of the claim or the extent of the lien has been altered by the payments made during reorganization or by the conduct of the parties.

"These points have been briefed and argued here. The difficulty is that neither the reorganization court nor the Circuit Court of Appeals passed on them.The reorganization court passed solely on a question of jurisdiction - whether it had the power to make adjudications concerning the amount of New Jersey's claim which should be allowed and the validity and extent of her lien, or whether New Jersey's sovereign immunity stood in the way of such determinations. And the Circuit Court of Appeals did not pass on these questions because it, too, was concerned solely with the question of jurisdiction.

"These issues bristle with questions of New Jersey law on which we should not pass, even if we were to assume they are properly here, without the benefit of the views of judges who sit there and have a greater familiarity with local law and local practices than we.[Citing cases] * * * Moreover, we are now advised that there is presently pending before the Circuit Court of Appeals an appeal by the Attorney General of New Jersey from an order of the reorganization court denying leave to join the trustee as party defendant in a suit in the New Jersey courts to determine whether there was a valid settlement of the tax claims and to stay further determination of that controversy in the federal court until the state courts have passed on the question. If the Circuit Court of Appeals orders the application granted, cf. Thompson v. Magnolia Petroleum Co., 309 U.S. 478, 483, 60 S. Ct. 628, 630, 84 L. Ed. 876; Ex parte Baldwin, supra, 291 U.S. [610] page 619, 54 S. Ct. [551], 555, 78 L. Ed. 1020, the state law phases of the controversy will be authoritatively settled. If the other course is followed, the issues can be resolved by the reorganization court on a record more adequate than the present one for purposes of review. Whatever procedure is followed it is more fitting that those more versed than we in the intricacies and niceties of New Jersey law first pass on these questions."

I. The first question to be passed upon is therefore whether a state court or a federal court should decide if the setting aside of a state statute applies to a party not represented in the state court and if the parties are bound by an alleged compromise reached earlier under that void Act.

If that were the only question present, the problem could be determined quite simply in favor of the federal court. There would be involved between parties properly in a federal forum under the terms of the Bankruptcy Act, 11 U.S.C.A. ยง 1 et seq., a number of state law questions to be decided by an application of state law as prescribed by Erie Railroad v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188, 114 A.L.R. 1487. There is no problem of the violation here of the federal constitution by a state statute as yet unconstrued by state courts, such as was present in Spector Motor Service, Inc., v. McLaughlin, 323 U.S. 101, 65 S. Ct. 152, 89 L. Ed. 101; Alabama State Federation of Labor et al. v. McAdory, 325 U.S. 450, 65 S. Ct. 1384, 89 L. Ed. 1725; City of Chicago v. Fieldcrest Dairies, 316 U.S. 168, 62 S. Ct. 986, 86 L. Ed. 1355; Railroad Commission of Texas v. Pullman Co., 312 U.S. 496, 61 S. Ct. 643, 85 L. Ed. 971; and Beal v. Missouri Pacific R. Co., 312 U.S. 45, 61 S. Ct. 418, 85 L. Ed. 577. There is ordinarily no state problem so difficult that its solution must on that ground be shunted to state courts. Meredith v. Winter Haven, 320 U.S. 228, 64 S. Ct. 7, 88 L. Ed. 9. There is no lack of relevant New Jersey law on constitutions and contracts to force the court below to request state scrutiny of the facts at bar as in Thompson, Trustee, v. Magnolia Petroleum Co. et al., 309 U.S. 478, 60 S. Ct. 628, 84 L. Ed. 876.

But there are additional factors which must be kept in sight in determining the forum for the questions involved. There is the final New Jersey decree stating the Settlement Acts are unconstitutional as to the world. There is the permanent New Jersey injunction against action by the State Treasurer, without whose acceptance of tax payments nothing can be done. Whether any New Jersey court has really passed on the constitutionality of the Settlement Acts as to the debtor and whether any such court has really meant there is no contract will be ...

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