In the Matter of Iowa Railroad Company, Debtor. Union Pacific Railroad Company v. Terry F. Moritz, Trustee of Iowa Railroad Company

RAILROAD RIPPLE, IOWA of Matter EASTERBROOK Before COMPANY, Debtor. GRANT, Senior Judges, Judge.* District COMPA- RAILROAD PACIFIC UNION Judge. EASTERBROOK, Circuit Plaintiffs-Appellees, al., NY, et from October endured Railroad Iowa During these November Rail- MORITZ, Iowa of Trustee largely with Terry F. operations, years conducted Defendant-Appellant. Company, of other miles road over equipment, rented involved its business ofMuch track. lines’ 87-1082. & Nos. carriers. more by two freight handled carrier —for first was Iowa Appeals, When Court United States shipment aup picking example, Circuit. Seventh the Union over turn it would grain that 3, 1987. Argued June coast—it west to the haul Pacific move- entire charge for the collected 23, 1988. Feb. Decided the same do would carriers ment. Other Banc Rehearing En Rehearing originated shipments for 18, 1988. March Denied end At the terminating line. was Iowa business and its month, Iowa showing vouchers other sent each partners transporta- collected they had sums Perhaps the lines. provided tion $50,000on behalf collect would Iowa $10,- Pacific Pacific, Union Union carriers Iowa. of the on behalf amounts, producing thase off set ran difference If the balance”. “interline favor, railroad Pacific’s Union filed Iowa When a bill. Iowa sent it owed bankruptcy, petition its shipments million $4 of about million $1.4 freight, more decide alone. Pacific Union designation. Indiana, sitting * Grant, District Northern A. Robert The Honorable 536 whether the railroad creditors have first right their payment. That the interline claim to the Iowa’s assets on ground creditors been short changed by the that interline balances are held in trust for Iowa does imply that the other credi- other railroads. If the interline balances tors should get nothing. in Justice a bank- funds, are trust then the railroads will be ruptcy case is according decision If law. paid in full and the Iowa’s other creditors general the Iowa’s creditors have the same get nothing; next to if they general are sort of property interest as the i^+^rline debts, unsecured all creditors will receive creditors, justice requires then coarto

about 64% their claims.** recognize both interests. As we said in Boston & Corp. Maine v. Chicago district court held that the interline Pacific Corp., 785 freight 562, (7th F.2d 566 funds, Cir.1986), are balances with cor- another case responding involving priority. interline court did not balances: rely any provision of the Bankruptcy Act or district court thought] [The that consid- relied, state instead, law. It on In re Penn erations of equity overrode the law. But Transportation Co., Central 519, 486 F.2d equity in law is the application consistent (3d Cir.1973) (en banc) (Adams, J., legal rules. The definition of inequity concurring), in Judge reject- unequal is application of Adams— norms. Feder- ing the majority’s conclusion that interline Department ated Moitie, Stores v. 452 balances are trust funds to the extent U.S. 401 [101 69 state law so characterizes them—concluded L.Ed.2d The bankruptcy 103] interline creditors are entitled to a treats all pre-bankruptcy claims of the preference “Congress’ because of interest same equally. class When one claimant in creating and maintaining a viable inter- gets treatment others, denied to system”. line rail Id. at 533. Judge they have been treated inequitably. Adams believed preference that a in bank- also, e.g., Bonded Services, Financial ruptcy is essential to ensure that railroads European Inc. v. Bank, American 838 participate in in which carrier (7th F.2d 893 Cir.1988); In re Chicago, collects the entire cost movement; Milwaukee, St. Paul R.R., & Pacific the abolition single-bill of this system, (7th F.2d Cir.1986); Guerin v. feared, Adams greatly “would im- Weil, Gotshal & Manges, 205 F.2d pede the smooth and efficient functioning (2d Cir.1953)(A. J.). Hand, decision through-route network.” at Id. this case turns on property rights, not no- The district court in this case added: “Prin- tions of equity. ciples of common sense and jus- elemental require tice that the railroad which earned II money be declared to be its owner.” Unless a specific provision of the Bank- I ruptcy Code requires result, a different mayWe dispose summarily of argu- function of bankruptcy law is to marshal ment from “common sense and elemental the debtor’s assets and distribute them ac- justice”. The railroads that moved cording to the property rights of the credi- freight are paid entitled to be (We so are put tors. to one managerial —but side tasks the people supplied who it with diesel fuel, such as maintaining the firm during a reor- and its other creditors. All of per- these ganization.) Those property rights are de- sons contributed ingredients essential fined in most cases state law. When the movement of earned defined, are so the bankruptcy court **The Iowa has assets of $4.4 about million in Iowa million; has an ad $7.2 damnum and if receivables, cash plus some machinery. plaintiffs prevail full, these the railroad’s lay interline creditors claim to $4.06 mil- debts million, $13 exceed with corre- lion; the Iowa’s trustee validity concedes the spondingly payoffs smaller for all creditors in disputes claims but priority. their Other the event the general are million; these, too, $1.9 claim are unsecured debt. largely undisputed. pending against A suit States, Cir.1962); Ry. v. United Southern alter them. rather implement Cir.1962); (5th Tennes- 306 F.2d States, 54- v. United Butner 1103, 1110-12 F.Supp. Ry., 917-19, 136 see Central 59 L.Ed.2d 57, 99 S.Ct. grounds, (M.D.Tenn.1970),vacated on Corp., 840 Reserve re American (1979); In Cir.1972). approach Maine, (6th This Cir.1988); F.2d 73 Boston & gener- that interline balances & said Boston assumed 565-66. F.2d at 1967 did get al, Not until do not debts. unsecured interline Maine seen, argue that the bal- interline It remains be creditor special treatment. otherwise enti- funds” or are “trust however, ordinary treatment ances just what the exceeding that available priority principal not law is the but tled may be. State expenses. Central rights; operating federal property other the source of F.Supp. rights, Jersey, and 273 too, these New may supply Co. Railroad of by adop- (D.N.J.1967), affirmed regulation of the rail busi- 288 pervasive federal Cir.1968), (3d brusquely tion, 392 F.2d 589 requires us to scrutinize law ness federal animated, survey is The not trust funds they are replied: care. “That some with however, by principle among we relationship are look- the several The clear. for rather than freight legal entitlements in ing for an interline engaged carriers best. seem us arrangements that debtor and creditor.” is that of movement whether question path in with start took different The Third Circuit subject. settles Bankruptcy Code It distin- of 1972. en banc decision its does, favor. in his it says that balances. trustee kinds of interline among guished 1978 trustee believes transpor- passenger Since freight and for Those dis- not subject disposes of the by one concluded, tation, Code are collected argu- of it, appreciation cussing 486 others. in trust for and held carrier background. requires a bit of ment V the (We Part discuss at 523-27. F.2d conclusion.) Other for this grounds court’s up belly turning have been Railroads charges per car diem interline balances— Stephen since frequency ever great being used cars line’s (rental of one operations Interline “Rocket”. son’s return), switching their pending another founding Ameri since the common been categories other and charges, several —the interline roads, so the treatment can general unsecured thought were court Mil subject. old See is an also balances not did debts, debtor largely because the (16 106 U.S. Ry., Logansport tenberger v. charge from customers specific collect L.Ed. 27 Otto) 293, 1 S.Ct generate and so did these balances for Congress Until 117 trust funds at 527-29. Id. a fund. Code, 205 11 U.S.C. § 77 to the old added § turned be balances pre-bankruptcy han bankruptcies were (1976), railroad all held, regard- immediately, the court over 77 receiverships; under equity § dled as creditors. competing the claims less reorga role in principal acquired a ICC re- however, be balances, could common principles but nizations 1976we reckoning. In final pending tained govern most relations continued holding that approach, different still a re- took equity rules among creditors. the immediate required rules ICC to enhance ceiverships permitted courts per diem interline pre-bankruptcy full of ex operating as debts incurred priority of trust they were balances, whether insol prior to months the six penses within Pa-& Rock Island Chicago, re opera funds. necessary to the continued vency or Cir.1976). In- (7th R.R., 906 F.2d Miltenberger, tion of the debtor. cific balances passenger freight applied terline 311, 1 at 162. Courts S.Ct. U.S. at to be expenditures operating current discus were extended principles, without pre-bankruptcy Other paid as arose. E.g., Gregg sion, to balances. as unsecured treated would be Co., 25 balances Trust Metropolitan rejected promptly Third (1905); debt. Southern 49 L.Ed. position that reiterating its holding, Flournoy, 301 F.2d Ry. v. per charge general, diem car balances are The Code as enacted does not so much as unsecured debts. In re Penn Central mention interline balances. See 11 U.S.C. Co., (3d Transportation Cir. provision into which § 1977). the Senate bill managers evolved. The from each side proposal remarked: Congress “[T]he When overhauled 1168(1) 1978, then, contained Section law in the Senate the Third Circuit treated (but passenger freight rejected bill is as no violative of principle oth- ers) funds; pas- equal trust this court treated treatment of all creditors under [of] senger op- balances as current title 11.” 124 Cong.Rec. (Oct. 5, erating expenses per diem accounts as 1978) (Sen. DiConcini), (Sept. funds; other courts had been silent 1978) Edwards). (Rep. (The bill lacks a since 1963. The rules in force in the Third report, conference managers but in each its and Seventh Circuits had pri- two effects: chamber read identical explanatory state- debts, ority for certain and pay- immediate into Congressional Record.) ments the (rather out with other se- failure of industry’s the lobbyists case). cured creditors at the end of the among was the considerations that led the (creditor) Lobbyists for solvent railroads First Circuit in In re Boston & Maine tried to consolidate gains. and extend these 307, Corp., (1st 600 F.2d Cir.1979), 313 to passed first, The House a bankruptcy bill reject Chicago, Rock and Island conclude including nothing subject. on prin- the per that interline diem balances car should cipal pending Senate, bill S. general, be treated as unsecured debt. We (1977), Cong., 95th 1st Sess. contained a then concluded in Boston & Maine v. Chi- provision (§ 1169) authorizing railroad’s a cago Pacific, 785 F.2d at that Chicago, trustee to pay pre-bankruptcy full all Rock Island had effectively been over- interline waiting balances without for a turned. Our Boston & Maine decision held approve court payment. to Witnesses that pre- and post-bankruptcy interline bal- objected for creditor railroads to this on the ances are not may “mutual” and debts ground require that it did not the trustee be offset. The argues Iowa’s trustee that pay to Hearings claims. on S. 2266 dispose events 1978also of the Third and H.R. Before the 8200 Subcommittee on holding Circuit’s that and Improvements in Machinery Judicial of the passenger balances are trust funds. Senate Judiciary, Committee on the 95th Cong., (1977) 1st (testimony Sess. Doubtless the excision language from on the Association American behalf pending may highly bill be informative. Railroads Union Rail- E.g., Pacific Carey Donahue, v. 240 U.S. 36 road). The reported, Committee then (1916). S.Ct. 60 L.Ed. 726 We cannot passed, Senate a bill providing: give bill, enacted, as meaning under chapter debtors [T]he shall was confronted and deleted. So if in- pay pursuant in cash statutory, [ICC], to try rely terline creditors on the 1978 recognized industry rail settlement they Code must lose. rely do not But procedures, or Commission orders of Code; on the they rely on ICC rules and general applicability, the current net bal- state predates law that the Code. The ances the debtor owed carri- excision only disagreement reflects ers on freight, its interline passenger and between House and Senate. The trustee per diem ... accounts periods believes disagreement —which prior both subsequent to the date of legislation blocked enactment of any filing petition without the necessi- the subject changed existing rules. An — ty approval. of court attempt change unsuccessful the law (em- 1168(1) Section of S. passed does not itself change the law in the phasis, added). E.g., other direction. v. Dean FTC Foods accept Co., House did 597, 608-12, this part of the 384 U.S. bill, Senate’s capitulated. 1744-47, the Senate (1966); Wong L.Ed.2d 802 proposes 10705(a)(1). If a carrier U.S.C. McGrath, Sung Yang show that cessation it out must to back (1950). 94 L.Ed. suspend the ICC appropriate, and of both by agreement act Congress must the discon- investigate the withdrawal Chadha, 462 U.S. chambers, INS v. see 10705(e); Chesa- 49 U.S.C. § tinuation. 2764, L.Ed.2d 919, 103 S.Ct. States, 704 Ry. v. United peake & Ohio accede to chamber to of one refusal If the Cir.1983). F.2d 373 change enough proposal were other’s regula- make power to ICC has the action, unicameral law, we reg- question, and these affecting the tions legisla- doomed problem same has of law. It the force may have ulations say is that a one can most tive veto. concerning per regulations promulgated Congress to compelled in 1978 stalemate ac- charges. Each railroad ear diem Whatever case. of this subject avoid at cars, pay for it must cept others’ If interline then, is. still law was Ex returning Parte them. fixed until rates under “trust funds” freight balances Compensation, 334, Car Service No. rail- creditor giving then governing authority (1980),invoking under I.C.C. does beneficiaries of trust the status roads not exercised It has 49 U.S.C. § equal treat- principle not violate respect to however, with power, regulatory requires priority rule ment; absolute balances. passenger interline freight or If inter- first. paid to be beneficiaries in trust require have interests do not power line also has The ICC preference accounts, them funds, giving 49 then see U.S.C. of system uniform that creditors accounting promotes the rule violate Uniform 11142. § So equally. ratemaking, cf. be treated class judgments same comparative property type 194, of Co., what 224 U.S. remains: question Transit ICC v. Goodrich have? (1912), creditors interline do interest L.Ed. 729 32 S.Ct. (some) rail- how extensively regulates ICC Ill interline balances. for account roads rules could be These 1200-1201. possi- C.F.R. §§ have three The interline treat- interests property of a source federal stat- rights: property sources ble balances, asked and we interline ment of sufficiently law, interests utory federal. subject. this briefs on supplemental for of federal creation strong to demand holds, Butner law. and state common “some” qualification that the out It turns reit- Maine in Boston & opinion our and accounting rules for the ICC’s important, is source of the usual erates, state law that railroads, lines with I only to Class apply cases—ex- rights creditors’ per year. exceeding million $50 revenues held. in Penn Central majority actly as the (c). Iowa 1201(A)(l-l)(a), 49 C.F.R. § Judge Adams’ court followed The district (revenues less III railroad a Class was however, did In and so opinion, concurring gov- not annually) and therefore million $5 R.R., 623 F.2d Ann Arbor re rights they rules; whatever by the erned inter- federal Cir.1980),concluding that the not do I among Class establish re- rail national in a unified est Moreover, the account- Iowa. apply to the treated as to be interline balances quires trustee the Iowa’s assist ing rules up federal take We therefore trust funds. rail- requires apply. ICC extent III, common law in Part first —statute law due balances interline account roads law turning to state in Part IY—before receivable”, interline and as “accounts V. in Part payable”. as “accounts payable and Rules 49 C.F.R. § does Act Commerce The Interstate hint do not rules indeed, accounting is, It interline balances. mention accounted segregated be funds among carriers. relations mostly silent conclude, there- monies. for as interline services offer They need not regulations fore, statutes federal may or- although the ICC through rates — creditors. support routes, 49 do through establishment der the IY A grounded federal rule must be in a concrete federal interest with which the Transportation The old Policy, National application of state law would interfere. (1976), preceding proclaimed 49 U.S.C. 1§ dispute That involves the interstate objective “developing, a federal coordi transportation enough. network is not nating, preserving transpor a national v. County, Miree DeKalb 433 U.S. system”. tation wrote Adams (1977), 53 L.Ed.2d 557 rejecting against background. See 486 F.2d at argument that the flow commercial (relying 531 & n. on the National justifies aviation concerning national rule Transportation Policy). The Staggers Rail airports’ responsibility to make it safe for application Act of 1980 ended the of this planes to take off. Even when the United policy Transpor to railroads. The new Rail party, States is a and multi-state transac- 10101a, Policy, speaks tation 49 U.S.C. involved, tions are must ordinarily courts permitting competition “to the maximum find in state law the rules of decision. (§ 10101a(l)) possible” extent “mini- Foods, Inc., United States v. Kimbell mizpng] the need for Federal regulatory 715, 727-29, U.S. 1457-59, 99 S.Ct. transportation control the rail system” over (1979). L.Ed.2d 711 10101a(2)). (§ promot It does not mention parties Private stand on both sides of ing a unified See ICC system. national rail Congress transaction. has not occu- — Texas, U.S. -, v. 107 S.Ct. pied question. field in So a dem- 93 L.Ed.2d 809 onstration substantial conflict between assume, however, mayWe shippers’ state law and the objec- achievement of an ability conveniently to send over a tive defined federal support law would impor- network of connected railroads is an conclusion that federal law controls. Ex- objective, making tant federal cooper- some regulation tensive is no substitute for a among ation railroads essential. Dennis E.g., conflict. Louisiana Public Service Klamer, W. Carlton & Mark The Need J. FCC, Comm’n Firms, For Among Coordination With (1986); 90 L.Ed.2d 369 Silkwood v. Special Industries, to Network Corp., Kerr-McGee Reference (1983). 50 U.Chi.L.Rev. 446 We also as- 78 L.Ed.2d 443 And it is hard sume, Adams, with Judge that convenience identify to a conflict between state and ability pay single includes the to a policies carrier federal even if failure to treat in- for Judge the entire movement. Adams terline balances as trust funds should lead treating believed that interline carriers as railroads bill separately. customers This unsecured question creditors would lead to in- is at most each a of convenience. separate sist on payment, ending Small up, doubt, the conve- conveniences add no payment system shippers nient prefer in system, now use. current but the part company separate him inconvenience of step invoicing with at this —both because it is strike at the life not the sort of blood of interest that interstate permits the commerce. creation of federal common law supported. because it is not B. The Judge heart of position, Adams’ adopted, the district court is the be- say A. To that there is a federal com- lief treating that interline railroads as mon governing law interests funds re- unsecured compel creditors would them to by ceived say rail carriers is to that state deny to customers the convenience of uni- law is preempted. Until Butner many tary billing. Both Adams and the courts believed bankruptcy that permitted judge district viewed this as so obvious federal courts override state rules when argument that unnecessary. was We do that would be light desirable in of some not find it obvious at all. objective. Butner disapproved of approach, holding that that property rights security, complete Railroads need as- under state govern unless there is a surance. of interline contrary federal rule. payment assures of debts most automati- may A traveler transfers. use interline ers Pacific the Union “pays” the Iowa cally: covering a ticket Airlines buy from United transportation services providing by single A multiple carriers. on carrier. a movement originating is the Pacific Union start phone call rail- charge risk covers debts. become nets Only the in- lines, por- move over MCI’s small Ameritech’s correspondingly on ais take roads trunks, Nynex’s lines. and end on terstate their revenues. tion of among themselves apportion carriers risk deal with ways to have Railroads Yet in joint service. for the payments the bal- on carriers collecting by default of paid the sums businesses are of these none set- the automatic remaining after ances as trust treated originating carrier creditworthi- scrutinize is to One offs. subsequent carriers. for funds firms as just trading partners, their ness of carpets depart- of Sellers ordinarily do. Although no business. airline Take the credi- unsecured as treated are stores ment this, most carriers requires statute bankruptcies, but department-store tors in whose others agreements with credit. trade end of to the not led this has interchanges feasible—either make routes as usual. do business will railroads Sound through Airline contracts individual shaky finances with Collecting carriers Inc., formed House, Clearing association bonds, let- secure post required may be even do this Airlines purpose. for ways to assure credit, find other o: ters of common has become though railroads to the receipts they turn over Braniff, are Frontier (Continental, transportation. part provide even They do so examples). prominent devices. such economy teems has collected one airline though sums credit assure Standby letters another rendered transportation daily. transactions dollars for billions debts. unsecured treated as many a financing for provide Factors (Bkr. Inc., No. 482-00369 Airways, Braniff their protect To firm. capitalized thinly 1, 1983). problems Feb. N.D.Tex. in- commonly receive investments, factors pale be bankrupt airline collecting from properly. them apportion coming sums collecting bank from problems side the aof equivalent imagine the easy to It is billions Agents receive agents. rupt travel receiving the business in the railroad factor fur for services from travelers of dollars invoices, then Iowa’s remittances to all airlines airlines; they stand nished and hold- its due Pacific sending the Union Union to the stands Iowa much Other Iowa’s account. ing rest Agency, 667 Travel re Morales Pacific. on a cash Iowa put the could also Cir.1981), holds that (1st in advance basis, receiving payment debts are unsecured the airlines claims services transportation quantity fixed go on deal Yet airlines agencies. travel keep the collec- the Iowa (which let reap travelers agents, and ing travel with movement), take or could the entire tion for also, e.g., of convenience. benefits and cash Iowa’s in the security interests Enterprises, 33 Transport In re Shulman course, they could do And, of receivables. affirmed, 744 F.2d (S.D.N.Y.1983), B.R. require other largely have done: what relation Cir.1984),holding that the (2d quickly, exceptionally remit railroads forwarding services freight air between any exposure at holding to a minimum transporta supplying airlines below.) de- These (More on this moment. of debtor-creditor. is that tion Railroads reasonably well. work vices system on one-charge much employed the looks business carrier The motor years, at least shipments may enter into carriers Motor same. had held 1973 no court though agreements, until even route through joint funds. prescribe may interline balances that and the ICC U.S.C. originating or The appropriate. them experi- something from can learn price of the collects carrier destination industries, airline too. The ence divisions remits movement business, entire the tele- business, trucking owing sums treat Courts business, other carriers. oth- several communications better E.g., to other carriers as unsecured debts. off. We agree therefore do not Penn-Dixie Steel 10 B.R. 878 Corp., giving re Adams that interline creditors (S.D.N.Y.1981); Lines, Allied Van Inc. v. priority claims on the funds bankrupt (E.D.Mo.1980), SBA, F.Supp. af- preservation essential to the firmed, (8th Cir.1982). 667 F.2d 751 transportation system. national Perhaps lack of trust status —and the fact that mo- help; it would express we no on view the tor carriers face risks at least long run system. merit of the It is not so airlines, great agents, as travel and rail- important that clearly may a federal court prevented not roads—has motor carriers .create federal common law to trump the offering from customers the convenience governs law .state competing claims to single per shipment. of a bill a debtor’s funds. parties have not to our atten called tion business other than railroads in which even one court has treated interline V They balances as trust funds. also have opinion of the court in Penn Central attention, to our called and we could held that interline balances between find, industry treat Class I railroads are held in trust under ment of interline balances as unsecured state law. railroad creditors has led to debts inconvenience to custom rely case holding. on that ers. The Third Heritage Capital Cf. CFTC v. Cir- Advis Services, Inc., ory say law; 823 F.2d 171 cuit did not Cir. which state’s neither 1987) (money deposited with a broker for do the railroad creditors here. The rail- manager

transfer to a is not held in trust apparently roads are content rely on a customer). This should not be a “general common if law”—as Justice great surprise. If customers value the con Holmes had never observed that there is no paying bill, venience of single firms body transcendental of law outside of supply will strive their desires. Those any particular State but obligatory with- figure out how to do so at least cost in it changed.... unless and until Law will flourish. is a word used with meanings, different may This seem to overlook the cost. If but law sense which courts the railroad business swallows losses in speak today of it does not exist without provide order to billing, convenient the cus- some authority definite it. behind pays in Perhaps tomer the end. one could common law so far as it is enforced in a argue that the financial health the rail- State, whether not, called common law or road depends business being able to is not the common law generally but the collect interline quickly. This is existing of that State by the authori- complete view, not a however. Railroads ty of regard State are on both without sides of these to what it transactions. If some secure, railroad is England more have been in anywhere another is less so. If interline always get creditors else. dollar, on the 100c then other (sup- Black and White Taxicab & Co. Transfer pliers fuel, equipment, and labor first v. Brown and Yellow Taxicab & Transfer them) among get less. They perceive the Co., 518, 533-34, greater risks as and must do pro- more to (1928)(Holmes, J., L.Ed. dissenting), tect security interests, themselves—take by Erie overruled R.R. v. Tompkins, 304 charge higher interest, and so on. Shippers 64, U.S. (1938). 82 L.Ed. 1188 pay costs, alternative too. See also Guaranty York, Trust Co. v. words, the risk of part failure is 99, 101-03, U.S. 1465-67, 65 S.Ct. the business. If railroads insulate some of (1945). L.Ed. law applicable to (interline their creditors roads) from the this case under the conflicts rules Illi risk, they expose other creditors more of nois, in sits, which the federal court may be it; end, someone bears the whole different from the trust Pennsylva law of risk, shippers pay the full cost. There panacea is no making parties nia. agree free to on sub- limits, however, within stantive law the month and the statements of net bal- subject have treated as on which 20th, by ances the nets are subject to differ. state laws do not The federal immediate collection. Each partici- railroad to the “whole courts refer law” pating in system the AAR’s has a microen- Stentor, v. state, Klaxon forum plastic coded card for each of the others. (1941). L.Ed. The creditor line uses the prepare card to (as here) parties say When do not sight against draft the debtor’s bank ac- the forum state’s conflict-of-laws rules re- count. puts The creditor road this draft quire application of another state’s sub- into the bank system just settlement as if it stantive apply this means we must signed were a check by the debtor railroad. Casio, forum state’s substantive law. Inc. The debtor’s pays bank ordinary Co., v. S.M. & R. 755 F.2d course. The balance paid thus is instantly Cir.1985). parties have done little to without action the debtor line. At enlighten law, however, us about Illinois Penn Central the time of the case, turning instead as the Third did to Class I railroads used system of sight (Second) the Restatement Trusts (1957). drafts cards; minus the then, microencoded principal Railroads use two methods to now, the creditor charge line took settle interline balances. Under the bill- obtaining payment from the debtor’s method, and-voucher which the Iowa used banks. existence, for most of its the destination Penn computes portions carrier Central dealt total with the charge each railroad involved in the move- May 1970, balances for the month before (The ment is entitled originat- to receive. that railroad entered bankruptcy. pe- ing carrier shipping collect tition was filed on June just as charges shipper, from the or the destina- sight May drafts for being were received. tion consignee; carrier from the in either The Penn Central’s banks dishonored case, the computes destination carrier drafts for about $15 million received on or revenue, divisions of way- because the final after June and the creditor railroads complete movement, bill shows the which asked pay- court to order route.) change could en The destination Restatement, Relying ment. on the carrier sends statements of entitlements Third Circuit concluded that the Penn Cen- called “abstracts” to all other in- railroads tral held this million in $15 trust for the volved the 18th of the month after the other railroads and ordered pay- immediate waybills were issued. The railroads send ment. monthly each other statements of sums recognized It 2 of the Re that under received for performed by movements oth- statement —and so far as we know the law ers, by (that is, the 20th of the month of all 50 states —a trust is a contractual immediately almost receiving after the ab- arrangement and depends therefore on the stracts). Railroads offset these state- Throp See La parties’ agreement. Bell ments, the creditor railroad sends a bill Savings Ass’n, Federal & Loan for the balance. 68 Ill.2d pays The debtor railroad this bill as it does others. It Ill.Dec. 370 N.E.2d 188 does not segregated maintain accounts. The Iowa The expressly railroads have not declared remitted 60 or days receiving more after its funds, interline balances to be trust bills, protest without by the creditor rail- they do not use some of customary roads. trusts, segregated indicia of such as ac regularly counts. The Iowa invested its The 28 Class I railroads use a different kept proceeds, remitting collections and method, prescribed by the Association of principal to the interline carriers. Eighty American Railroads. or so Class II shippers, potential And the settlors of such and III participate trusts, (while pertinent have no intent voluntarily about 420 small railroads use the but also do not how the railroads system). bill-and-voucher After know (or care, circulation by long of the abstracts the 18th of handle the funds much so delivered). against There is no ex- drafts its accounts. It declined to goods are pay presented interline balances until with press trust. waybills invoice; both an abstract of and an agreement Penn Central concluded that billed, (60-90 paid slowly day it de- express. The implied as well as may be common). lays were The other lines did prompt system of settlement AAR’s respond by insisting seg- that the Iowa implied to an payment amounted immediate benefit; regate its collections for their so agreement, the court held. trust shows, they far as the record did not even system treats each rail- AAR’s settlement protest payment. the slow When the Iowa collecting agent others. a road as failed, six it had at least months of interline commingled by the col- The funds be outstanding. It is difficult to re- railroad, they dispos- are lecting but at impression that the Iowa treated sist power of the creditor railroad with al creditors, and that as trade sight drafts. Penn Central thought write they acquiesced in treatment. This is significant payable that the funds were opposite of intent create a a manifest interest, insig- 486 F.2d at without trust, such an intent there is and without id. commingled, could be nificant 24 comment c: Restatement § no trust. magnitude daily collec- at 525. “It is essential to the creation of a trust tions, of interline roads number by that the settlor should manifest some (the with more than Penn Central dealt expression his external final and definitive 300), segregation imprac- made accounts a intention that trust should arise.” tical, thought. the court expression” important “external is to other sympathetic to the contention creditors, objective signs who need in order rules, accounting coupled the AAR’s priority to determine their own to the as- sight give system drafts that trading ostensibly part- sets held their creditor lines effective dominion over ners. funds, practical equivalent of decla- is the Although the the re Iowa did not hold of trust. The from the inter- ration trouble trust, ceipts express in perhaps it held perspective line creditors’ is that the Iowa trust. Under Restate resulting them as a participate did not in the AAR’s ment proper a transfer of § “[w]here During peri- more than a few months. ty person purchase is made to one od at issue in this case it used the bill-and- another, price paid by resulting is trust system, under which interline rail- voucher person by arises in favor of the whom the roads had no more control over Wilson, See purchase price paid”. is suppliers did Iowa’s of diesel fuel. 81 Ill.2d Ill.Dec. N.E.2d 23 Penn Central expressly distinguished such paradigm is the sale of a cow States, Ry. v. a case. Southern United B, tempo A B paying from to with Cbut (5th Cir.1962), F.2d de- rarily possession. holds the in C cow priority to inter- clined to accord treatment B, trust for B. A Or sells stock against the Southern line claims places the certificates with C to be held Ry. Tallulah Falls when Southern sub- name; C is trustee for B. Restate street and waited for more than a mitted bill ment Perhaps 440 Illustration 1. one demanding year paid, to be without say could that the Union Pacific transfer segregation Third of funds. The Iowa, red to the “services” which collected viewed this decision as consistent with its price; reading but the Iowa (486 525-26); apparently own it was transportation holds the services trust Southern cases like led Adams shippers. parties have not called urge the creation of federal common law attention, found, to our and we have not protect interline creditors fail to who treating “resulting any case as a trust” the protect themselves. money received from a customer when the , South- blending goods closer to The Iowa’s case much seller was or services of ern than to Penn Central. suppliers selling The Iowa did several them as a resulting sight carry “A ... seeks to not allow other railroads to write unit. interest). rather a donative intention than to All creditors have out of the Iowa’s a wicked scheme.” American Na services; supplied goods thwart all valuable States, Bank & Trust Co. v. United tional have No case of which we been stiffed. (7th Cir.1987) (Illinois employs the idea of the “con- aware law). argues shippers No one that the priorities among structive to settle trust” in a consignees resulting- settlors suppliers. bona fide business Several have —the any particular approach intent In re North approach. E.g., rejected this —had apportion how the Iowa would about Ltd., Currency, American &Coin shipping charges. They cared (9th Cir.1985); Capi- First F.2d 1573 they transportation they paid receive Mortgage Corp., tal Loan 60 B.R. 915 for, they did. in Illinois the Since “bur (Bkr.D.Utah 1986). The sellers of diesel proof upon party seeking den of is might argue fuel as well that a construc- resulting establish a trust and evidence their favor. What we tive trust runs clear, convincing must be and unmistak contracts, is a breach of which is not able”, Wilson, Ill.Dec. at N.E.2d enough trust, id. at to create a constructive approach yield at this does not § mileage. railroads much The air and truck expressly The Iowa did not declare above, transportation cases discussed we trust; it held funds in it segregate did not in principle those closest to the railroad funds; its it did not accede to the AAR’s case, reject argument all that the col sight put drafts that would airline, trucker, lecting agent or travel disposal funds at the of the interline rail- holds the funds in trust for the carriers roads; protest these railroads did not providing the service. glacial payment. Nothing Iowa’s possibility The last we need consider is way the Iowa did business would have the “constructive trust” under the Restate alerted other creditors that the funds os- (1937), provid ment Restitution tensibly in its control were held in trust. ing person trust arises “[w]here We therefore conclude that the interline holding property subject title to is to an general, balances are unsecured debts of equitable duty convey it to another on the Iowa. ground unjustly that he would be en Reversed Remanded permitted riched if he it.” were retain The interline railroads mention but do not seriously pursue possibility. A con RIPPLE, Judge, concurring. usually depends structive trust on a fraud join judgment opinion I assets, ulent act to obtain control of the see separately emphasize the court. I write Corp.,

In re General 828 F.2d 699 Coffee that, explicitly as the court notes the last (11th Cir.1987) (Florida law); Fender IV, holding several sentences of Part our is Yagemann, 29 Ill.2d 193 N.E.2d Congress policy on the choices has based (1963); put and the Iowa its hands on respect transporta- made with national money legitimately. There could be a policy. as to whether this tion Our views unjust decent if claim of enrichment we policy appropriate one are irrelevant had to decide whether the stockhold Iowa’s legal question to a resolution of the before get ers or the interline railroads should us. coffers; money remaining in the Iowa’s unjustly enrich the stockholders to money. receive this But that is not the

problem. question in is whether the get money

terline railroads all of the (and suppliers of diesel fuel tort credi

tors) none; or all creditors share whether inadequate suppliers funds. “unjustly

diesel fuel will not be enriched” (without

if receive of their debts 70%

Case Details

Case Name: In the Matter of Iowa Railroad Company, Debtor. Union Pacific Railroad Company v. Terry F. Moritz, Trustee of Iowa Railroad Company

Court Name: Court of Appeals for the Seventh Circuit

Date Published: Mar 18, 1988

Citation: 840 F.2d 535

Docket Number: 86-2760 & 87-1082

Court Abbreviation: 7th Cir.