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IN RE NEW YORK

February 19, 1943

In re NEW YORK, O. & W. RY. CO.


The opinion of the court was delivered by: HULBERT

This motion, made by the trustee of the debtor, brings on for consideration objections interposed by him, and a committee representing a group of institutional bondholders, Bankers Trust Company, as trustee under Debtor's Refunding 4% Gold Mortgage and the New York Trust Company, as trustee under the Debtor's General 4% Gold Mortgage, to claims filed by the People of the State of New York:

(1) On or about August 15, 1941 for $ 22,877.28, with interest, and

 (2) An amended claim filed March 11, 1942 for $ 425,796.72 with interest.

 The facts have been stipulated. The amount involved is not disputed.

 The issue is whether the State has a first and paramount tax lien or a priority only over general creditors.

 Counsel for the Westmoreland Coal Company, one of a group of 'six months creditors', while neither a party nor an intervenor, has also submitted a brief in support of the trustee's motion to sustain the objections filed.

 The debtor, and its predecessors have, for about 74 years operated a railroad whose lines of communication now extend from the Port of New York (Weehawken, N.J.) to the Port of Oswego, New York, and Scranton, Pa.

 The debtor's real estate, with improvements thereon, and certain of its other assets, are encumbered by a Refunding 4% Gold Mortgage, dated June 1, 1892, given to secure an issue of $ 20,000,000 principal amount of bonds outstanding and unpaid, and a General 4% Gold Mortgage, dated May 31, 1905, given to secure an issue of $ 12,000,000 principal amount of bonds outstanding and unpaid; said mortgages being recorded in each jurisdiction wherein any real estate or other property of the debtor covered by the lien thereof, is, or was, located.

 The increase in the use of highways by motor vehicles and the increase in the number of highways due, to some extent, at least, to the development of the territory served by the New York, Ontario and Western Railway and other railroads, accentuated a condition of danger at grade crossing on the lines of railroads. This prompted the Governor of the State of New York to propose, and its Legislature authorized necessary legislation to enable the People of the State to vote upon amendments to its Constitution and authorize a bond issue of $ 300,000,000, in order to carry out a comprehensive and effective plan of grade crossing eliminations.

 Since 1897 statutory provisions have existed in this State for such purpose but had not proved effective largely because the Legislature had failed to appropriate its share of the monies necessary to that end.

 The State Constitution (Sec. 1 of Article VII and Sec. 9 of Article VIII) expressly prohibited the State from lending its credit to any individual, corporation, or association, until Section 14 was added to Article VII, effective Jan. 1, 1926, and since amended, effective Jan. 1, 1928. These amendments are set forth in a footnote *fn1" the portion of the last amendment being indicated by the words italicized.

 As authorized by the first of said amendments to the Constitution, Chapter 233 of the Laws of 1926 provided the method by which such crossings at grade, as public safety required should be eliminated, would be determined upon; the cost to be borne, 25% by the State, 25% by the locality in which the improvement was made, and 50% by the railroad company. The proceeds of the authorized issue of State bonds were to be used, in the first instance, to pay the entire expense of the elimination, unless the railroad corporation should elect to pay directly its share out of its own funds. If any railroad having made such election, should thereafter fail to pay the proportion of expense of such elimination, the proceeds of such State bonds would then be used to that end. Provision was made for payments from time to time for work done, as partial accountings were had, on vouchers approved by the State Superintendent of Public Works, after audit by the State Comptroller, and upon warrants issued by him. Upon completion of the work of each grade crossing elimination, and the submission by the Public Service Commission of its report approving the same, the Comptroller was required to determine the number, amounts, and times of repayment to be made to the State by the railroad corporations, and others liable, 'in such manner so far as practicable so that the state would be able to pay therewith when due the portion of the state debt, exclusive of that part properly chargeable to the state, incurred for such elimination and interest' and fix a time, not less than ten days thereafter, for a hearing. The Comptroller was directed, after such hearing, to make his final determination as to repayment and serve a written statement thereof upon the railroad corporation and others liable, and repayment was required of the amounts as therein prescribed.

 The debtor had elected, in writing, to make such payments in 50 equal annual instalments. In the event of its failure so to do the Act provided: 'the amount or amounts so due and payable shall be and become a first and paramount lien upon all real property of said railroad within the municipal corporation within which the work is done, and the same with interest thereon shall, upon written request of the comptroller, be assessed and levied upon the railroad property in said municipal corporation and collected in the same manner that taxes and assessments are collected by such municipal corporation. The municipal officer collecting such money shall forthwith turn over the same to the state treasury.'

 In accordance with the second amendment to Article VII of the Constitution, Chapter 678 of the Laws of 1928 effected certain changes in conformity therewith.

 Subdivision 3 of Section 4 of that Act reads:

 'In the event of the failure or refusal of the railroad corporation * * * or the successor * * * thereof, to pay the amount or amounts specified in such statement at the times therein prescribed, the amount or amounts so due and payable may be recovered as follows:

 'The comptroller may certify the amount or amounts so due and payable to the board of supervisors of the county or counties in which the crossing is located, whereupon, it shall be the duty of such board of supervisors to apportion the amount or amounts so certified to the several towns and cities in such county according to the assessed valuation of the real property of such railroad corporation, or corporations or the successor or successors thereof in such respective towns and cities and to place the several amounts so apportioned on the respective assessment rolls of such towns and cities and to issue its warrant or warrants for the collection thereof. Thereupon it shall become the duty of such towns and cities through their proper officers to collect the respective several amounts so apportioned in the same manner as other taxes are collected in such towns and cities and when collected to pay the same to the county treasurer of such county who shall thereupon pay the same into the state treasury. Any amount so levied shall thereupon become and be a first and paramount lien upon all real property of such railroad corporation or corporations or the successor or successors thereof within such respective towns and cities.' (Italics mine.)

 A considerable amount of grade crossing elimination work was under way when, on May 20, 1937, the debtor filed a voluntary petition for reorganization, pursuant to Section 77 of the National Bankruptcy Act, Title 11 U.S.C.A. § 205. The trustee appointed did not qualify until July 15, 1937. This delay was occasioned by the necessity of applying to and securing the approval of the Interstate Commerce Commission. Title 11, Sec. 205 sub. c(1).

 Meanwhile, by petition, verified June 22, 1937, the debtor sought permission to pay to the State instalments of principal, and interest, as they accrued, and an order was made on June 28, 1937, granting such authority. $ 14,224.94 had been repaid by the debtor, or the trustee of the debtor, when the question was raised by the mortgage indenture trustees as to whether the State was entitled to the payment of these instalments at the expense of the debtor's secured creditors and since that time the trustee has defaulted as to all such payments as they became due, and, by order dated June 25, 1941 he was ...


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