Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

In re Chicago

decided: September 28, 1987.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. 77 B 8999 #61 -- Thomas R. McMillen, Judge.

Wood, Jr., and Ripple, Circuit Judges, and Fairchild, Senior Circuit Judge.

Author: Wood

WOOD, JR., Circuit Judge

The United States appeals from an order of the district court approving a plan of reorganization for a railroad. The government, as a creditor for railroad retirement taxes, contends that the plan of reorganization does not provide for an appropriate rate of interest to be paid on the taxes that have been due the government since 1977. The government takes the position that it is entitled to interest at the rates determined under the Internal Revenue Code, 26 U.S.C. §§ 6621 & 6622 (Supp. 1986), and not at the rate of 7.5/8.5 percent determined by the district court to be fair and equitable under the Bankruptcy Act, 11 U.S.C. § 205(e) (1976) (repealed 1978). The government also contends that the plan does not provide for the payment of a tax penalty to which the government is entitled. The government asserts that, in view of the fact that the railroad proved ultimately to be solvent, the government is entitled to a penalty in excess of $120,000 for the railroad's failure to pay taxes for 1977.


In late 1977 the insolvent Chicago, Milwaukee, St. Paul & Pacific Railroad Company ("Railroad") filed for reorganization under section 77 of the Bankruptcy Act, 11 U.S.C. § 205 (1976) (repealed 1978).*fn1 The district court immediately entered an order that required the Railroad to continue rail operations to meet section 77's public interest goal of preserving existing rail service. To assist the Railroad in continuing rail service, the district court forbade the Railroad from paying debts the Railroad owed to any pre-petition creditors. This prohibition on paying debts included 1977 railroad retirement taxes due to the Internal Revenue Service ("government").

The Railroad's rail operations continued to produce massive deficits. In 1978, the first year after the reorganization petition was filed, the Railroad lost $82 million. In 1979 the Railroad lost an additional $118 million. To meet the Railroad's operating requirements, the Railroad's Trustee borrowed hundreds of millions of dollars and sold $220 million of the Railroad's property. Toward the end of 1979 the government filed a proof of claim of approximately $2.4 million for the unpaid 1977 railroad retirement taxes.

The Railroad continued to lose money and sought permission from the district court in 1980 to liquidate. The district court refused to grant permission to liquidate and required the Railroad to continue providing rail service. After several plans of reorganization had been submitted to the district court, as well as to the Interstate Commerce Commission, the district court approved the sale of the Railroad's core rail assets to the Soo Line Railroad Company for cash and for the assumption of the Railroad's rail liabilities.*fn2 This sale left the Railroad with assets of cash, securities, and some real estate with which it would operate as a reorganized business entity. At this point the Railroad was solvent with $390 million available to satisfy $169 million in claims. Shortly after this sale the Railroad's Trustee filed a 1985 Plan of Reorganization ("1985 Plan"). The 1985 Plan set out various classes of creditors which would receive differing payment priority. Class A creditors had superior status with claims for expenses of administration. Class B creditors were debenture holders. Class C creditors were the general unsecured creditors. The 1985 Plan characterized the government's tax claim as a Class C claim. The 1985 Plan provided that, like all other Class C creditors, the government would be entitled to receive full payment of its principal claim, plus post-petition interest at the Illinois statutory rate of 5 percent.

Several creditors objected to the 5 percent rate of post-petition interest proposed by the 1985 Plan, suggesting more appropriate rates ranging from 7.5 to 18 percent. The government in particular sought a higher interest rate, as defined in sections 6621 and 6622 of the Internal Revenue Code, which is tied to the prima rate. 26 U.S.C. §§ 6621 & 6622 (Supp. 1986). In addition the government for the first time sought pre-petition penalties from the Railroad for its failure to pay 1977 railroad retirement taxes. Negotiations ensued between the creditors and the Railroad and the Railroad's Trustee. The negotiations resulted in a compromise 7.5/8.5 percent rate of interest.*fn3 With the exception of the government, all of the other Class C creditor agreed to the compromise 7.5/8.5 percent rate of interest.

In July 1985 the district court approved the modified 1985 Plan. The government appeals the district court's order approving the modified 1985 Plan.


In a railroad reorganization the district court sits as a court of equity in approving a plan of reorganization and ruling on the plan's treatment of creditors' claims. In re Boston & Maine Corp., 719 F.2d 493, 495 (1st Cir. 1983), cert. denied, 466 U.S. 938, 104 S. Ct. 1913, 80 L. Ed. 2d 461 (1984). The district court can approve a plan of reorganization only if the plan is "fair and equitable" and provides for equal treatment among creditors. 11 U.S.C. § 205(e) (1976) (repealed 1978). Review of the district court's determination that a particular reorganization plan is fair and equitable is governed by an "extremely limited standard of review." In re Chicago Pacific Corp., 773 F.2d 909, 916 (7th Cir. 1985). That limited standard of review is similar to the abuse of discretion standard of review. As the Supreme Court has explained:

We are not performing the functions of the District Court under § 77 (e). Our role on review is a limited one. It is not enough to reverse the District Court that we might have appraised the facts somewhat differently. If there is warrant for the action of the District Court, our task on review is at an end.

Group of Institutional Investors v. Chicago, Milwaukee, St. Paul & Pacific Railroad, 318 U.S. 523, 564, 87 L. Ed. 959, 63 S. Ct. 727 (1943).

The first issue the government raises is that it is entitled to a statutory rate of interest on its tax claim, as provided in the Internal Revenue Code, instead of the 7.5/8.5 percent rate set out in the plan of reorganization, as provided in the Bankruptcy Act.*fn4 Initially this seems to raise a direct conflict between two statutory schemes. One scheme, the Internal Revenue Code, calls for interest to be applied to delinquent taxes at a statutory rate closely tied to the prime rate. The other scheme, the Bankruptcy Act, calls for the district court to select an interest rate that is fair and equitable. If this was merely a question of which of two relevant statutory schemes was applicable, then the district court would have applied one instead of the other as a matter of law. We would have reviewed such a decision de novo. But this case did not arise in a vacuum. It is not primarily a tax case in which the Railroad is seeking to pay an equitable and fair rate of interest instead of the statutory rate. Rather, this case is a railroad reorganization. All railroad reorganizations are governed by the fair and equitable rate mandated by the Bankruptcy Act. Determining a fair and equitable rate of interest to be applied in a particular reorganization is left to the broad discretion of the reorganization court. We will affirm the rate of interest set by the reorganization court if we conclude that the court did not abuse its discretion in setting the rate.

The government concedes that the fair and equitable standard of the Bankruptcy Act governs the selection of an appropriate interest rate in this reorganization.*fn5 The government also recognizes that the district court's selection of a particular rate of interest is subject to the abuse of discretion standard of review. But the government argues that the only fair and equitable rate that can be applied to its tax claim is one that affords it full compensatory treatment. Because the Internal Revenue Code sets out specifically a statutory rate of interest, the government contends it is entitled to that rate to ensure that the government receives full compensation on its tax claim. The government argues that what is fair for all the other creditors in these circumstances is not fair for it, as the government is entitled to its claim in full. The government's position could also have some adverse impact on what has been found to be fair for all the other ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.