In the Matter of the Central Railroad Company of New Jersey, Debtor. Appeal of George P. Baker , 469 F.2d 857 ( 1972 )

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”).¹ Long Branch, in an Operating Agreement entered into with Central and PRR on January 31, 1930,² 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 “\_t~]hus, 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 “[t]he 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 “[b]eeause 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 “[t]his 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 Debt- or’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 have every reason to rely, on the limitation proceeding to present their claims.” (emphasis supplied).

In Hartford Accident & Indemnity Co. v. Southern Pacific Co., 273 U.S. 207, 47 S.Ct. 357, 71 L.Ed. 612 (1927), the Court stressed the equitable nature of a limitation of liability proceeding, and declared that “[i]t looks to a complete and just disposition of a many-cornered controversy . . . .”

In doing so, the Court, after citing Providence, and its progeny, said (pp. 215-216, 47 S.Ct. p. 359):

“It is quite evident from these cases that this Court has by its rules and decisions given the statute a very broad and equitable construction for the purpose of carrying out its purpose, and for facilitating a settlement of the whole controversy over such losses as are comprehended within it, and that all the ease with which rights can be adjusted in equity is intended to be given to the proceeding. It is the administration of equity in an admiralty court. Dowdell v. United States District Court [9 Cir.,] 139 F. 444, 445. The proceeding partakes in a way of the features of a bill to enjoin a multiplicity of suits, a bill in the nature of an interpleader, and a creditor’s bill. It looks to a complete and just disposition of a many-cornered controversy, and is applicable to proceedings in rem against the ship as well as to proceedings in personam against the owner, the limitation extending to the owner’s property as well as to his person. The City of Norwich, 118 U.S. 468, 503 [6 S.Ct. 1150, 30 L.Ed. 134].” (emphasis supplied).

In Just v. Chambers, 312 U.S. 383, 61 S.Ct. 687, 85 L.Ed. 903 (1941), it was held.that “[w]hen the jurisdiction of the court in admiralty has attached through a petition for limitation, ...” it “acquires the right to marshal all claims, whether of strictly admiralty origin or not, and to give effect to them by the apportionment of the res. . . .” 312 U.S. 386, 61 S.Ct. 690.

The holding stated was prefaced by this statement (pp. 385-386, 61 S.Ct. p. 690):

“The statutory provision for limitation of liability, enacted in the light of the maritime law of modern Europe and of legislation in England, has been broadly and liberally construed in order to achieve its purpose to encourage investments in shipbuilding and to afford an opportunity for the determination of claims against the vessel and its owner. Norwich [and New York Transp.] Company v. Wright, 13 Wall. 104, 121 [20 L.Ed. 585]. It looks to a complete disposition of what may he a ‘many cornered controversy,’ thus applying to proceedings in fern against the ship as well as to proceedings in personam against the owner, the limitation extending to the owner’s property as well as to his person. The City of Norwich, 118 U.S. 468, 503 [6 S.Ct. 1150, 30 L.Ed. 134]; Hartford Accident [& Indemnity] Co. v. Southern Pacific Co., 273 U.S. 207, 216 [47 S.Ct. 357, 71 L.Ed. 612]. It applies to cases of personal injury and death as well as to cases of injury to property. Butler v. Boston Steamship Co., 130 U.S. 527, 552 [9 S.Ct. 612, 32 L.Ed. 1017]; The Albert Dumois, 177 U.S. 240, 259 [20 S.Ct. 595, 44 L.Ed. 751]. The limitation extends to tort claims even when the tort is non-maritime. Richardson v. Harmon, 222 U. S. 96 [32 S.Ct. 27, 56 L.Ed. 110].” (emphasis supplied).

The exclusive jurisdiction of an admiralty court in a multiple-claims-inadequate-fund limitation proceeding is of such dimension that an Admiralty Court cannot grant permission to a claimant to establish his claim in another tribunal. Pershing Auto Rentals, Inc. v. Gaffney, 279 F.2d 546 (5 Cir. 1960). (In the instant case there were multiple claims aggregating $1,700,000.-00 and the $1,150,000.00 settlement was inadequate to satisfy them).

The Supplemental Rules, F.R.C.P.,³ applicable to actions for exoneration from or limitation of liability, evidence, in Rule F(8), the exclusive jurisdiction of the Admiralty Court with respect to disposition of claims presented in such actions.

Rule F(8),⁴ captioned “Objections to Claims: Distribution of Fund” provides that the Admiralty Court “shall” divide “the fund deposited or secured” “among the several claimants,” and “[a]ny interested party may question or controvert any claim without filing an objection thereto.” The latter provision would permit the Reading Company to present to the Admiralty Court the objections which it raised in the Reorganization Court with respect to PRR’s right to resort to the settlement fund for reimbursement of the $370,241.47 it had advanced to Long Branch in Central’s behalf. Thus, independent of all else, there was no reason, or justification, for the Reorganization Court’s consideration of Reading’s objections.

It is clear from what has been said that the Admiralty Court has exclusive jurisdiction in the instant case with respect to the distribution of the proceeds of the settlement of the limitation proceeding now in its Registry, and that the Reorganization Court was accordingly without jurisdiction to adjudicate rights of claimants to the res in the Registry, as it did in its Memorandum and in its October 13, 1970 Order No. 368.

It must be noted parenthetically that the Admiralty Court in its “Final Judgment and Final Injunction,” entered in the limitation proceeding on September 5, 1969 — more than a year prior to the filing of Order No. 368 — specifically provided that the res in its Registry was “subject to the further order of this Court regarding distribution of the monies represented by said security [res].”

It must further be observed that the Reorganization Court did not take note, in its Memorandum, of the recited provision in the Admiralty Court’s September 5, 1969 judgment, nor did it discuss the question of its own jurisdiction with respect to the distribution of the res in the Admiralty Court Registry.

In accordance with what has been said the holding of the Reorganization Court, in its Memorandum, that PRR is not entitled to distribution from the Registry of the $370,241.47 it advanced to Long Branch in Central’s behalf, must be reversed for lack of jurisdiction, and the Court’s Order No. 368, which gave effect to the stated holding, must be vacated.

Although it is not critical, or essential, to our stated disposition, this, too, must be said with respect to the appellants’ challenge to the Reorganization Court’s holding that PRR was not entitled to distribution from the Registry of the $370,241.47 it advanced to Long Branch in Central’s behalf:

As earlier stated, the genesis of this holding was the Reorganization Court’s view that Central had “assumed an overriding obligation to repay the advances made on its behalf by PRR,” in letters of agreement exchanged between PRR and Central.

The letters of agreement do not afford an iota of. nourishment to the Reorganization Court’s stated construction. To the contrary, they establish that both PRR and Central looked to the proceeds of the limitation proceeding, or an independent suit against Grace Line, “to repay the special advances made by Pennsylvania in connection with this accident, advances made by Pennsylvania for Central Railroad of New Jersey being included.” (emphasis supplied).⁵

As the Reorganization Court said in its Memorandum, “[t]he letters of agreement between PRR and the Debtor [Central] clearly expressed their understanding of the transaction which was the subject matter thereof”; viz., PRR’s advances to Long Branch in its own and Central’s behalf.

There were three letters in all: June 17, 1966, June 23, 1966 and July 18, 1966.

On June 17, 1966, PRR by letter, advised Central, inter alia, that it would advance to Long Branch Central’s share of the emergency expenses flowing from the drawbridge accident on these conditions: (1) Central was to pay PRR 6% interest on advances to Long. Branch made in its behalf; (2) “[a]ll proceeds received by way of insurance or suit will be used to repay our advances and our advances on your behalf”; (3) “[u]ntil any deficiencies in the repayment of advances made by us either for ourselves or for you are eliminated, the proceeds from the sale of real estate or other sources will be applied to these advances”; (4) “[t]o the extent there is an overage accruing out of this accident regardless of source and regardless of whether it is received by the New York and Long Branch, Central Railroad of New Jersey or Pennsylvania, this shall be divided up as an offset against the expense of the Central Railroad of New Jersey and Pennsylvania on a percentage basis and proportioned to the agreed upon expense incurred by each railroad”; and (5) “New York and Long Branch costs for this accident to the extent they should be properly capitalized will be handled on a 50-50 basis and to the extent that they are expense items they will be split on the customary 57%-43% basis.”

On June 23, 1966, Central wrote PRR in reply to its June 17, 1966 letter, agreeing in substance to PRR’s terms “with respect to the problem of advances to the New York and Long Branch,” but restating them so as “[t]o have no misunderstanding.” The June 23rd letter, set forth in the margin,⁶ specifically provided as follows with respect to the repayment of any and all of PRR’s advances to Long Branch:

“(2) All proceeds received by the New York and Long Branch by way of insurance or suit will be used to repay the special advances made by Pennsylvania in connection with this accident, advances made by Pennsylvania for Central Railroad of New Jersey being included.” (emphasis supplied).

On July 18, 1966, PRR wrote to Central in relevant part as follows:

“Your letter of June 23 satisfactorily sets forth my understanding of the terms under which The Pennsylvania Railroad Company has committed itself to advance funds to The New York and Long Branch Railroad Company in connection with restoration of the Raritan River bridge.” (emphasis supplied).

Our stated view that the Reorganiza-don Court erred in its construction of the letters of agreement renders unnecessary consideration of the rulings of the Court with respect to the impact of the New Jersey Uniform Commercial Code in this ease.

These observations are in order:

The Reorganization Court disregarded these undisputed facts: Long Branch is the claimant in the Admiralty Court for the $740,482.95 damages incurred by it as a result of the drawbridge accident, and it alone can be compensated by the admiralty Registry for its damages outlay; the circumstance that on its recovery from the Registry of its damage expenses Long Branch will repay to PRR the advances it made to finance such expenses is irrelevant to any PRR-Central status as to these advances.

The result reached by the Reorganization Court would grant a “windfall” to the bankrupt Central of the $370,241, advanced by PRR to Long Branch in Central’s behalf, at the expense of the bankrupt Penn Central, PRR’s successor. Such a result cannot by any stretch of the imagination be termed equitable and it does violence to the traditional concept of a bankruptcy court as a court of equity.

For the reasons stated the disposition made by the Reorganization Court in its Memorandum will be reversed, and its Order No. 368 will be vacated, and the cause remanded with directions to proceed in accordance with this opinion.

1 . The Pennsylvania Railroad Company merged with The New York Central Railroad Company in February 1988. The merged railroad became Penn Central Transportation Company in May 1969, and the latter filed a petition for reorganization under Section 77 of the Bankruptcy Act, 11 U.S.C.A. § 205 et seq., on June 21, 1970.

2 . The 1930 Agreement extended for ft 999-year term an Agreement between Long Branch, PRR and Central dated January 2, 1888.

3 , The Supplemental Rules, effective July 1, 1966, are the successors to the former General Admiralty Rules, rescinded the same date.

4 . Rule F(8) reads as follows:

“Any interested party may question or controvert any claim without filing an objection thereto. Upon determination of liability the fund deposited or secured, or the proceeds of the vessel and pending freight, shall be divided pro rata, subject to all relevant provisions of law, among the several claimants in proportion to the amounts of their respective claims, duly proved, saving, however, to all parties any priority to which they may he legally entitled." (emphasis supplied).

5 . Central’s letter of June 23,1966 to PR.R.

6 . Central’s June 23, 1966 letter to PRR stated:

“Thank you for yours of June 17th with respect to the problem of advances to the New York and Long Branch. I am purposely replying to you on Central Railroad of New Jersey letterhead as I think the commitment primarily relates to the Central Railroad of New Jei'sey rather than New York and Long Branch.

“To have no misunderstanding with respect to the two railroads, I would restate your five points as follows :

“(1) To the extent that amounts are advanced by Pennsylvania Railroad on behalf of the Central Railroad of New Jersey’s obligation to participate in necessary advances to the New York and Long Branch to meet extraordinary expenses because of the Raritan River Drawbridge accident on March 3rd, the Pennsylvania will charge Central Railroad of New Jersey interest at 6%. This will be applicable to whatever such advances on behalf of Central Railroad of New Jersey may be, regardless of whether the need for the money is for capital or expense items.

“(2) All proceeds received by the New York and Long Branch by way of insurance or suit will be used to repay the special advances made by Pennsylvania in connection with this accident, advances made by Pennsylvania for Central Railroad of New Jersey being included.

“(3) Until all deficiencies in the repayment of advances to the New York and Long Branch, in connection with this accident, made by the Pennsylvania on behalf of itself or Central Railroad of New Jersey, have been eliminated the proceeds from the sale of New York and Long Branch real estate or any other unusual source of funds to the New York and Long Branch, will be applied to the satisfying of these advances.

“(4) To the extent that the recovery of costs from this accident exceed the complete satisfaction of advances made directly to the New York and Long-Branch, such recovery will be apportioned to the Pennsylvania and the Central Railroad of New Jersey in the ratio of the costs resulting from this accident which each of these railroads liad separately.

“(5) With respect to necessary advances to the New York and Long Branch because of this accident it is understood that advances covering capital items are a responsibility on a 50/50 basis as between Pennsylvania and Central Railroad of New Jersey, but if they are expense items the advances will be considered as being-on the customary basis of 57% Pennsylvania and 43% Central Railroad of New Jersey.

“In the above I have not intentionally changed our commitment nor have I done other, I hope, than clarify to avoid any possible misunderstanding of the points covered in your June 17th letter. It is entirely agreeable to me to have this letter represent an expression of Central Railroad of New Jersey responsibility but if you prefer to have a more formal agreement prepared by your Law Department, that is likewise acceptable to us.”