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In re Central Railroad Co.

decided: November 7, 1972.

IN THE MATTER OF THE CENTRAL RAILROAD COMPANY OF NEW JERSEY, DEBTOR. APPEAL OF GEORGE P. BAKER ET AL.


Kalodner, Adams and Max Rosenn, Circuit Judges. Adams, Circuit Judge (concurring and dissenting).

Author: Kalodner

Opinion OF THE COURT

KALODNER, Circuit Judge.

The appellants challenge an order of the federal district court for the District of New Jersey, sitting in bankruptcy, which concerns the distribution of a fund in the Registry of the federal district court for the Southern District of New York, sitting in admiralty.

The challenge is premised on the contention that the Admiralty Court has exclusive jurisdiction as to the distribution of the fund in its Registry, fruit of a settlement of a limitation of liability proceeding under the provisions of 46 U.S.C.A. §§ 183 and 186, and thus the Bankruptcy Court erred in adjudicating, in a Memorandum opinion on which its challenged Order was predicated, the ultimate distribution of the fund in the Admiralty Court.

The sum of the appellees' contention is that the Bankruptcy Court "has paramount jurisdiction to determine the issue" as to the distribution of the fund in the Admiralty Court, and that the Bankruptcy Court did not err in its adjudication as to the respective rights of Claimants to the fund.

The following facts are undisputed:

On March 3, 1966, the vessel Santa Isabel, owned by Grace Line, Inc., rammed and damaged a drawbridge which spans the Raritan River between South Amboy and Perth Amboy, New Jersey. The drawbridge was part of the 39.36 miles of railroad and appurtenant facilities, extending from Perth Amboy to Bay Head, New Jersey, owned and maintained by The New York and Long Branch Railroad Company ("Long Branch"), which in turn is owned in equal shares by The Central Railroad Company of New Jersey ("Central") and The Pennsylvania Railroad Company ("PRR").*fn1 Long Branch, in an Operating Agreement entered into with Central and PRR on January 31, 1930,*fn2 granted them the joint use of its tracks and facilities.

On March 4, 1966, Central, by letter, advised PRR that its cash position prevented it from advancing to Long Branch its share of the expenses incurred by the emergency situation. After stating that " there is complete liability on the part of the Grace Lines . . ." and "thus, we should reasonably expect to recover all of the costs and losses involved in due course," the letter requesting PRR to make " whatever cash advances may be necessary " to Long Branch, with the assurance that Central would pay PRR interest on Central Railroad's proportion of such advances as may be necessary, "if, for any reason, it is not recovered from the insurance carriers." (emphasis supplied). PRR acceded to Central's request. It advanced to Long Branch $740,482.95 to meet its emergency expenses -- PRR's half share and Central's half share.

On April 12, 1966, Grace Line, Inc. filed a petition for exoneration from or limitation of liability with respect to the damage to the Raritan River drawbridge in the United States District Court for the Southern District of New York, Docket No. 66 AD 363, in admiralty.

On May 23, 1966, Long Branch, PRR and Central filed a claim in the admiralty proceeding against Grace Line, Inc. and the S. S. Santa Isabel in the aggregate amount of $1,700,000.00 made up as follows: Long Branch $900,000.00; PRR $300,000.00 and Central $500,000.00.

On March 23, 1967, Central filed a petition for reorganization under Section 77 of the Bankruptcy Act, 11 U.S.C.A. § 205 et seq., in the United States District Court for the District of New Jersey ("Reorganization Court").

Late in 1968, counsel for Long Branch, PRR and Central in the admiralty proceeding, recommended they accept a settlement of $1,150,000.00 from Grace Line, Inc., subject to payment of a counsel fee of $110,000.00. "A Formula for Distribution of Grace Line Settlement" was then agreed to by the Claimants under which PRR was to receive $834,251.02 net and Central $205,748.98 net. The allocation to PRR included these items: (1) $740,482.95 in reimbursement of PRR's advances to Long Branch in its own behalf and in Central's behalf; (2) $84,889.94, PRR's consequential damages by reason of the drawbridge accident; and (3) $8,878.13, balance of $34,989.13 interest owed by Central to PRR on the latter's advance of $370,241.47 to Long Branch in Central's behalf, after crediting Central with $26,111.00, its share of the proceeds of sale of two parcels of real estate owned by Long Branch, which had been distributed to PRR. The $205,748.98 allocated to Central under the Formula was in reimbursement of its consequential damages.

On January 8, 1969, Central's Trustee in Bankruptcy filed a petition with the Reorganization Court requesting authorization of (1) the $1,150,000.00 settlement with Grace Line, Inc.; (2) payment of a $110,000.00 counsel fee out of the proceeds of the settlement; and (3) distribution of the $1,040,000.00 net proceeds of the settlement -- $834,251.02 to PRR and $205,748.98 -- in accordance with "the terms of the June 23, 1966 agreement concerning the distribution of settlement funds."

On August 6, 1969, the Reorganization Court, following hearings in January and March 1969, entered an "Interim Order" authorizing Central's Trustee to join in the $1,150,000.00 settlement and payment of $110,000.00 legal fees. The Interim Order was "conditioned" upon the deposit of the net proceeds of the settlement "in the Registry of the United States District Court for the Southern District of New York." It further specified "that the Trustee shall take no further action with regard to the distribution of such proceeds until after determination by this Court of the issues presented on Trustee's petition herein."

On September 5, 1969, the Admiralty Court entered a "Final Judgment and Final Injunction" which adjudged Grace Line, Inc. "entitled to shipowner's statutory limitation"; ordered it to pay $1,150,000.00 to Long Branch, PRR and Central "in full settlement of and satisfaction of their claims," less $110,827.04 counsel fee and costs; and directed that the $1,039,172.96 balance be converted into an interest bearing security or time deposit registered in the names of Long Branch, PRR and Central, and "deposited in the Registry of this Court, subject to the further order of this Court regarding distribution of the monies represented by said security." (emphasis supplied).

On August 25, 1970, the Reorganization Court filed a Memorandum opinion denying approval of the request made by Central's Trustee in his January 8, 1969 petition, for authorization "to abide by the terms of the June 23, 1966 agreement concerning the distribution of settlement funds," under which PRR was to receive, inter alia, the $740,482.95 it had advanced on its own behalf and that of Central to Long Branch.

The Reorganization Court, in its Memorandum, adjudicated the legal rights of PRR and Central with respect to the settlement proceeds in the Registry of the Admiralty Court, and further, it fixed the specific amounts of the payments to be made out of the Registry to PRR and Central. In doing so, the Court held that PRR was entitled only to the $370,241.48 it had advanced in its own behalf to Long Branch, and $84,889.94, representing the consequential damages of $147,589.94 it had suffered as a result of the damage to the Raritan drawbridge, less $62,700.00, PRR's share of the $110,000.00 counsel fee. PRR, the Court held, was not entitled to recoup from the Registry, the $370,241.47 it had advanced to Long Branch in behalf of Central because, in the Court's view, it was not a "subrogee" of Central as to this advance, but merely an "unsecured creditor" of Central with respect to it. These holdings were based on the Court's construction of letters of agreement exchanged by PRR and Central in June and July 1966 with reference to PRR advances to Long Branch in Central's behalf. After stating that "the letters of agreement between PRR and the Debtor [Central] clearly expressed their understanding of the transaction which was the subject thereof," the Court construed the letters as agreeing "that PRR would look to a specific source (the lawsuit against Grace Lines) for payment, but that the Debtor, regardless of whether or not that source turned out to be fruitful, assumed an overriding obligation to repay the advances made on its behalf by PRR." The letters of agreement, said the Court, "constituted a security agreement within the meaning of N.J.S.A. 12A:9-105(h), 12A:1-201(3)," with respect to the fruits of the settlement of the limitation proceeding, and "because PRR has not followed the statutory requirement [of the New Jersey Uniform Commercial Code] by filing a financing statement covering its security interest, such security interest was not perfected under state law," and as a consequence "this unperfected security interest is subordinate to the rights of a person who becomes a lien creditor without knowledge of the security interest. N.J.S.A. 12A:9-301(1)(b)." (emphasis supplied).

On October 13, 1970, the Reorganization Court filed Order No. 368, predicated on its holdings in its Memorandum. After stating the conclusion reached in its Memorandum "that the proposed distribution of the settlement fund should not be approved since such distribution would effectuate an illegal priority of PRR," Order No. 368 "ordered" Central's Trustee to "join with" PRR and Long Branch, "in taking all steps necessary and appropriate to accomplish, without prejudice to the rights" of PRR and Long Branch, the following:

"(1) Withdraw from the Registry of the United States District Court for the Southern District of New York, the sum of $370,241.48, plus interest accrued thereon representing the money advanced by PRR on its own behalf, and to pay said sum to PRR;

"(2) Withdraw from said Registry the sum of $84,418.53, representing the consequential damages ($147,589.94) suffered by PRR as a result of the damage to the drawbridge, less PRR's share of the counsel fee and disbursements ($63,171.41) and pay said sum of $84,418.53, plus interest accrued thereon, to PRR;

"(3) Withdraw from said Registry the sum of $205,393.35, representing the Debtor's consequential damages, after adjustments, and less the Debtor's share of the counsel fee and disbursements ($47,655.63) and to deposit said sum of $205,393.35, plus interest accrued thereon, in Debtor's general account; and

"(4) The Trustee is hereby instructed to take appropriate action to obtain for the Debtor the undistributed balance." (emphasis supplied).

On this appeal from Order No. 368, appellants contend primarily that (1) the Admiralty Court has exclusive jurisdiction as to the distribution of the fund, or its proceeds, in its Registry, and thus the Reorganization Court erred in adjudicating rights to the distribution of the fund; and (2) the Reorganization Court erred in holding that PRR was not entitled to distribution from the Registry of the $370,241.47 it had advanced to Long Branch in behalf of Central.

On the score of their first contention, appellants urge that the Reorganization Court, both in its Memorandum and Order No. 368, "assumes to distribute funds actually in custody of the Admiralty Court in connection with the limitation proceeding," and " directs eventual disposition of the fund on the basis of the Reorganization Court's own view of the questions involved, instead of leaving such disposition to the Admiralty Court where the fund is." (emphasis supplied).

On review of the record, we subscribe to the appellants' stated contentions.

The threshold question presented is whether the Admiralty Court's jurisdiction is exclusive with respect to distribution among claimants of a fund in its possession which is the fruit of a settlement in a statutory limitation of liability proceeding where, as here, the claims exceed the fund.

The question must be answered in the affirmative.

It has long been settled that once an Admiralty Court acquires jurisdiction in a limitation of liability proceeding, its jurisdiction is exclusive of all other forums, where the amount of the claims exceeds the value of the vessel and its freight. Providence & New York Steamship Company v. Hill Manufacturing Company, 109 U.S. 578, 594-595, 3 S. Ct. 379, 617, 27 L. Ed. 1038 (1883).

The vitality of Providence was reaffirmed in Maryland Casualty Co. v. Cushing, 347 U.S. 409, 416, 74 S. Ct. 608, 98 L. Ed. 806 (1954). There Mr. Justice Frankfurter, speaking for the Court, said at page 417, 74 S. Ct. at page 612:

"The elaborate notice provisions of the Admiralty Rules [Nos. 51-54, 334 U.S. 864] are designed to protect injured claimants. They ensure that all claimants, not just a favored few, will come in on an equal footing to obtain a pro rata share of their damages. To permit direct actions to drain away part or all of the insurance proceeds prejudices the rights of those victims who rely, and ...


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