Appeal from the District Court of the United States for the Southern District of New York.
Before SWAN, CHASE, and CLARK, Circuit Judges.
This is an appeal from an order of the District Court in the reorganization proceedings, under § 77 of the Bankruptcy Act, 11 U.S.C.A. § 205, of the New York, Ontario & Western Railway Company made upon petition of the debtor's trustee and certain of its creditors objecting to claims of priority and lien of the State of New York in proof of certain grade crossing elimination claims. The order, so far as it went, substantially denied the petition, allowed the two claims, dated August 15, 1941, and March 11, 1942, in the respective amounts of $8,274.08 and $340,862.42, with interest, and adjudged that the State had a valid lien in the total sum of $349,136.50, with interest, against the debtor's real property. It reserved determination "as to the priority of the State's lien," without prejudice, for further consideration. Appellants are the debtor's trustee, the trustee of the debtor's Refunding 4% Gold Mortgage of 1892, the trustee of the debtor's General 4% Gold Mortgage of 1905, and one of a group of "six months' creditors" of the debtor, who, although not an intervenor, was allowed to file a brief below in support of the petition.
The debtor's railroad extends from Weehawken, New Jersey, to Oswego, New York, that portion of the line which lies within the State of New York being operated under a franchise from the State Legislature. By authority of a 1925 amendment to the New York Constitution, Art. VII, § 14, the Legislature adopted in 1926 what is known as the Grade Crossing Elimination Act, Laws 1926, c. 233, superseded by Laws 1928, c, 678, McKinney's Unconsolidated Laws, §§ 7901-7912. This act empowered the State Public Service Commission to order the elimination of any grade crossing which in the Commission's opinion was a menace to the public safety. Half the cost of the elimination was to be borne by the railroad whose crossing was to be eliminated, half by state and county governments, in the proportion of 49 per centum by the State and one per centum by the county or counties in which the crossings were located. If the railroad so elected, the State was authorized to pay the railroad's share in the first instance, the railroad being obliged to repay the State in a manner to be determined by the State comptroller, so that the principal and interest of the State debt incurred for such eliminatioin might be repaid when due.
Pursuant to this authority the Commission ordered the elimination of certain crossings on the debtor's lines, and the debtor elected in writing in all of the claims involved in this appeal to have the State pay its share of the cost of elimination in the first instance and to repay the State in installments of prinicpal and interest over a period of fifty years. Upon the completion of the work, therefore, the comptroller, after hearings and notice to the debtor, determined that the total amount of the assessments for the debtor's share of the cost, payment of which was postponed, was $425,796.72. In every case the debtor expressly consented to the determination of the comptroller, the last consent being filed on January 2, 1936.
There was no default in the payment of any installment prior to May 20, 1937, when the debtor filed a voluntary petition for reorganization under § 77 of the Bankruptcy Act. On June 22, 1937, before ratification of the appointment of a trustee, the debtor prayed for permission to continue the payments on the installments as they accrued, referring to them as "for all substantial purposes to be regarded as taxes due and payable out of the Debtor's property." Six days later the district court made an order granting such permission. The installments for the entire year of 1937 were then paid. Beginning in 1938, however, the trustee of the debtor defaulted in the payment of the installments and continues in default.
Section 4(3) of the Grade Crowwing Elimination Act, Laws 1928, c. 678, McKinney's Unconsolidated Laws, § 7904(3), provided, prior to 1940, that "In the event of the failure or refusal of the railroad corporation or corporations, or the successor or successors 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: * * * ." Then followed detailed provisions to the effect that the comptroller should certify the amounts due and payable to the boards of supervisors of the counties in which the crossings were located, whereupon it became the duty of these boards to apportion the certified amounts among the towns and cities of their counties according to the assessd valuation of the real property of the railroad in each town and city, to place the amounts so apportioned on the assessment rolls of the towns and cities, and to issue warrants for the collection thereof. The final two sentences are as follows: "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."
By Laws 1940, c. 396, effective April 11, 1940, there were inserted in the first sentence of § 4(3) which is quoted above, after the word "prescribed," the following words, "or in the event of dissolution of such railroad corporation or corporations or successors, the entire indebtedness of such corporation in process of dissolution shall become due and payable upon said refusal"; the act then continued as before, that "the amount or amounts so due and payable may be recovered" according to the detailed statutory scheme there set forth.
Upon the default here the comptroller duly certified to the boards of supervisors of the various counties the amounts in question; but it appears that before the latter boards could complete the assessment and apportionment of taxes so provided by the act, the district court entered a restraining order preventing such action. The court vacated the restraining order on June 25, 1941, but directed the trustee to make no payments on the claims until its further order. Completion of the assessments was then made and the State filed the proofs of claim herein involved. The claim of August 15, 1941, is for the installments due for the years 1938 and 1939, while that of March 11, 1942, is for the balance of the principal due on the debtor's share of the cost of the eliminations. The latter claim is based on the premise that upon the debtor's default the entire sum owed became immediately payable, a premise to which the 1940 amendment quoted above is particularly pertinent.The sole questions on this appeal concern the existence of a lien in favor of the State for either or both of these claims. Under the court's reservation, the relative priority of such a lien, if existing, is not yet determined. And no question as to the amounts of the claims is involved, the parties having stipulated as to the correct amounts (at figures somewhat less than those stated in the respective claims), which were then incorporated by the district court in its order.
The Claim for the Overdue Installments. There can be no doubt of the general power of a state to create a lien for debts owed to it. This authority stems from the prerogative right at common law which gave the British Crown priority over all other creditors for payment out of a debtor's property. The first Constitution of the State of New York, promulgated in 1777, provided that the common law of England which constituted the law of the Colony on April 19, 1775, should be and continue the law of the State. Since this provision has never been repealed, the People by virtue thereof have succeeded to the Crown's prerogative right of priority. In re Carnegie Trust Co., 206 N.Y. 390, 99 N.E. 1096, 46 L.R.A., N.S., 260, affirming 151 App.Div. 606, 136 N.Y.S. 466; Marshall v. People of State of New York, 254 U.S. 380, 41 S. Ct. 143, 65 L. Ed. 315. As Justice Brandeis points out in the case last cited, 254 U.S. at page 384, 41 S. Ct. 143, 65 L. Ed. 315, the only changes of the right made by statute in New York have been usually by enlarging its scope. Thus, while the priority had been held not to obtain over a specific lien created by the debtor before the sovereign undertook to enforce its right, Wise v. L. & C. Wise Co., 153 N.Y. 507, 511, 47 N.E. 788, the Legislature had extended the prerogative right so as to give certain taxes priority over prior encumbrances, a notable example being that of the franchise tax, which took priority over earlier mortgages on the corporate property. New York Terminal Co. v. Gaus, 204 N.Y. 512, 98 N.E. 11.*fn1 Even the Wise case has been overturned by statute, as the Court of Appeals has recently pointed out. In re David Brown Printing Co., 285 N.Y. 47, 54, 32 N.E.2d 787. The question thus turns upon the intent of the New York Legislature, as expressed in the Grade Crossing Elimination Act.
The statute in question has its own ambiguities, for § 4(3), quoted above, provides for the apportionment and assessment as a tax of the installments due only after default, and "thereupon" the amount levied becomes "a first and paramount lien." Relying upon the chronological sequence followed by the statute, the trustee and the creditors argue that no lien could attach to the debtor's property until the procedure had been completed, and that, since it had not been completed when the reorganization proceedings were initiated, no lien effective in these proceedings had attached to the debtor's realty.
This argument is not without force in the language relied upon to support it. The great difficulty is, however, that all the procedure is designed to lead up to the existence of the State's claim as "a first and paramount lien" upon the debtor's property; and the result argued for is that in the very time when, as the history of railroad receiverships had amply demonstrated, the real occasion for a lien arose, the State would have none even to secure repayment of money which it had advanced on behalf of the railroad. No better example of legislative locking of the stable door after the complete vanishing of the horse can be conceived. Both the history of the legislation and the language which stresses the paramount character of the lien demonstrate a contrary intent.
It is agreed by stipulation, as, indeed, we all know, that the increase in the use of highways by motor vehicles and the increase in the number of highways accentuated a condition of danger at grade crossings where railroads operated trains across highways at great speed. This prompted the Governor to propose and the Legislature to authorize necessary legislation leading to a vote of approval upon amendments to the Constitution authorizing a bond issue of $300,000,000 to carry out a comprehensive and effective plan of grade crossing elimination. Prior statutory provisions had proved ineffective for the purpose until constitutional authorization was thus secured. Thereafter the Legislature went to great pains to insure the State's recovery of the sums advanced by it for the railroads.It is well settled that in the exercise of its police power for the protection of its citizens a state may require of even an interstate railroad that it abolish grade crossings at its own expense entirely, whatever the cost and without regard to its financial ability. See extensive discussion by Holmes, J., in Erie R. Co. v. Board of Public Utility Com'rs, 254 U.S. 394, 41 S. Ct. 169, 65 L. Ed. 322, citing earlier cases; In re Staten Island Rapid Transit R.Co., 220 App.Div. 80, 221 N.Y.S. 129, affirmed 245 N.Y. 643, 157 N.E. 892, writ of error dismissed Staten Island Rapid Transit Co. v. Transit ...