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In re Chicago & N.W.R. Co.

February 24, 1940


Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; John P. Barnes, Judge.

Author: Kerner

Before SPARKS, MAJOR, and KERNER, Circuit Judges.

KERNER, Circuit Judge.

This appeal is taken from an order of the District Court in a railroad reorganization case, which disposed of claims filed by appellant for services rendered. The Court allowed one claim, disallowed another, granted a set-off, and classified the claims as general and not entitled to priority. The appeal presents a problem going to the validity of the set-off and to the validity and nature of the claims in question, which in turn depend upon the character of the contract relation between the creditor and the debtor.

On June 28, 1935 the Chicago and North Western Railway, hereinafter referred to as the "Debtor" or "Railroad," sought reorganization under Section 77 of the Bankruptcy Act, 11 U.S.C.A. ยง 205, and by July 1, 1935 the Trustee was appointed. In due time the Pullman Company, hereinafter referred to as the "Creditor" or "Pullman" filed its claims. The claims as amended amounted to $94,731.82, and consisted of two items as follows: (1) Electric lighting from August 1933 to May 1934 - $28,348.04; and (2) Mileage from January 1, 1934 to July 1, 1935 - $66,383.78.

The Trustee objected to the claims, and furthermore asked for a set-off amounting to $27,852.68. The controversy was then referred to a Special Master, who found that a balance of $495.36 should be allowed as a general claim against the estate of the Debtor. The Master allowed item No. 1, disallowed item No. 2, and granted the set-off in question. In its order the District Court adopted and confirmed the Master's findings of fact and conclusions of law, from which the Creditor appealed.

Item No. 1. Electric Lighting. In the instant case the bulk of the record stands on documentary evidence. Although some oral evidence was adduced, it is not conflicting nor does it present a question of credibility of the storyteller. The facts are not in dispute, and in such situations the legal deductions and conclusions of law drawn by the District Court, while worthy of great consideration, are not binding on this court. Nor are the findings conclusive on this court, unless supported by substantial evidence. See Rule 52(a), Federal Rules of Civil Procedure, 28 U.S.C.A. following Sec. 723c.

The District Court stated the situation in this case adequately, when it remarked that there was "apparently little or no difference between the parties as to what transpired," the only difference being "as to the legal effect of what transpired." And, for that matter, there is here no difference as to the proper disposition of item No. 1. The Trustee admits that the Debto owes Pullman $28,348.04 for electric lighting service, and the evidence pertaining thereto is substantial. The order as to item No. 1 is affirmed.

Set-off. Tourist Car Controversy. In 1912 Pullman agreed to furnish sleeping car service on the Railroad's lines. This agreement was expressed in the form of a formal contract which governed their relationship for twenty years. Under it Pullman was to furnish Pullman cars and service. For this it was to receive the gross revenue per car per annum up to $7250, the Railroad was to take the next $1500, and the xcess above $8750 was to be divided between them.*fn1 This division of the gross earnings, with the dividing line at $7250 and $8750, is referred to in Article 3, Section 3, paragraph 1 of the formal contract.

The 1912 contract also provided a formula for counting cars, and this formula was used to determine the average revenue per car operated. As to tourist cars, the formula stated that only 67% of their actual days service was to be used, instead of 100% as in the case of parlor and standard sleeping cars. The effect of this was to increase the average earnings per tourist car and thus to add to the amount that the Railroad would obtain under the division of earnings arrangement. This 67% provision, prescribing the method for determining the revenue per tourist car, is referred to in Article 3, Section 3, paragraph 3 of the 1912 contract.

After 1920 Pullman expressed dissatisfaction with he division-of-earnings arrangement and sought to modify the $7250-$8750 division point. After the war Pullman's operating expenses averaged approximately $8000 per car per annum, and the customary division point in contracts made with other railroads after 1920 generally was placed at $9000. Finally, in 1928, the 1912 contract was modified so that the gross revenue in excess of $7250 per car per annum was divided between them, instead of the first $1500 over the $7250 division point going to the Railroad as formerly.

Following this amendment in 1928 operations were continued, but a difference of opinion soon arose as to the extent of the amendment. Pullman argued that the amendment deleted paragraph 3 of Section 3 of Article 3 of the contract, that is, that it eliminated the 67% provision. On the other hand, the Railroad contended that the amendment merely changed the division of earnings referred to in paragraph 1 of Section 3 of Article 3, and on this contention based its right to the set-off.

The amendment was the result of an interchange of correspondence between the parties, and obviously its scope depends largely on an analysis of that correspondence. On December 5, 1928 Mr. Sargent (Railroad) wrote to Mr. Hungerford (Pullman) to this effect: "You desire to have us readjust our contract to the Illinois Central basis as to earnings per car that accrue to the Pullman Company. * * * I would like to make this modified contract. * * * In all other respects we will let the old contract (1912) stand as it is." Now, the Illinois Central contract, as made in 1915, was substantially similar to the 1912 contract, and contained as did the 1912 contract an Article 3 devoted to a division-of-earnings arrangement and to a 67% counting formula. However, in 1925, the Illinois Central contract was amended, so that "in place of the provisions of Article 3" there was substituted a completely new arrangement, namely, that the Railroad and Pullman would divide the revenue in excess of $7250 per car per annum.

More leters passed back and forth, and then on January 26, 1929 Mr. Hungerford wrote Mr. Sargent as follows: "I will say to you now the proposition * * * to fix the dividing line at $7250, dividing equally the revenue in excess of that amount, is accepted." In return, on February 2, 1929, Mr. Sargent wrote Mr. Hungerford: "This letter may be treated by both of us as a sufficient contract * * * modifying Section 3 of Article 3 of the agreement (the 1912 contract) * * * so that * * * the Pullman Company will pay to the railway * * * one-half of all gross earnings ...

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