In the Matter of Chicago, Rock Island and Pacific Railroad Company, Debtor. Appeal of Texas North Western Railway Company v. The Atchison, Topeka and Santa Fe Railway Company

Citations: 860 F.2d 267; 1988 U.S. App. LEXIS 14458Docket: 88-1125

Court: Court of Appeals for the Seventh Circuit; October 20, 1988; Federal Appellate Court

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The case involves Texas North Western Railway Company (TNW) appealing a district court's decision that granted summary judgment to Atchison, Topeka and Santa Fe Railway Company (Santa Fe) and denied it to TNW. The dispute arises from a Trackage Rights Agreement between Chicago, Rock Island and Pacific Railroad Company (Rock Island) and Santa Fe, which was assigned to TNW by Rock Island's successor, Chicago Pacific Company (CPC), in 1985. The district court ruled that TNW lacked rights under the Agreement due to its prior termination by Santa Fe, which was not negated by a later compromise or prior bankruptcy orders.

On appeal, TNW contends that the district court erred in finding that Santa Fe properly terminated Rock Island's trackage rights and asserts that prior reorganization court orders prevented Santa Fe from terminating the Agreement. The 1971 Trackage Rights Agreement entitled Rock Island to operate trains on Santa Fe's tracks in exchange for a fee, including a termination clause that allowed Santa Fe to terminate the agreement if Rock Island failed to pay within a specified timeframe after written demand. Rock Island defaulted in 1979, and Santa Fe made several demands for payment, which were not fulfilled. Rock Island had previously filed for bankruptcy in 1975, and the trustee, William Gibbons, was involved in managing the railroad during this time. The court highlighted that the termination rights were preserved in the event of bankruptcy, requiring written demand and notice of termination to be sent to both Rock Island and its trustee.

On October 21, 1980, Santa Fe notified Mr. Gibbons, Trustee of the Chicago, Rock Island and Pacific Railroad Company, of its termination of the Trackage Rights Agreement due to Rock Island's default. Santa Fe argues that this notice effectively terminated the Agreement. Although Rock Island's rights under the Agreement were assigned to TNW in 1985 by its successor, CPC, Santa Fe denied TNW access to the Etter-Amarillo line, asserting that the Agreement had been terminated in 1980, thus rendering the 1985 assignment void.

TNW contends that the district court incorrectly concluded that Santa Fe had terminated Rock Island's trackage rights. While TNW acknowledges Rock Island's default, it claims Santa Fe's termination was ineffective as it did not comply with section 18 of the Agreement, which necessitates that separate demands for payment and notice of termination be sent to both the trustee and Rock Island. Santa Fe only sent written demands to Rock Island and terminated the Agreement solely through notice to the trustee.

However, the district court upheld that Santa Fe effectively terminated the Agreement, noting that, due to the bankruptcy and reorganization circumstances, notice to the only relevant entity in existence at the time—Mr. Gibbons—was sufficient. Following orders from the district court in January 1980 to cease reorganization efforts and liquidate, no separate Rock Island entity remained to receive notice. Thus, Santa Fe's notice of termination was deemed proper under section 18 of the Agreement.

Santa Fe's failure to send separate payment demands to the trustee did not breach the Agreement. Section 22 mandates a liberal interpretation to secure the parties' rights. Santa Fe retained the right to terminate the Agreement upon Rock Island's bankruptcy, provided it adhered to the dual notice requirements. These requirements ensured both the trustee and Rock Island were aware of any defaults or termination decisions. Since the trustee was performing the railroad president's duties, Santa Fe's notice was effectively communicated, satisfying the Agreement's terms.

TNW contends that a settlement between Santa Fe and the trustee negated Santa Fe's prior termination election. However, the settlement explicitly excluded the dispute over the trackage rights, indicating that it addressed only monetary claims. TNW's interpretation implies that the exclusion is meaningless, as it contradicts the intent of the settlement agreement. The district court correctly determined that the entire trackage dispute remained outside the scope of the settlement.

Santa Fe terminated the Trackage Rights Agreement in 1980, with a settlement reached in 1983. Although Santa Fe cannot demand past-due charges anymore, Rock Island's failure to pay those charges within 60 days constituted a default, justifying Santa Fe's termination of the Agreement despite the debts being discharged in the settlement. TNW contended that three bankruptcy orders from the district court prohibited Santa Fe from terminating the Agreement, arguing that these orders included injunctive language that restricted any actions affecting Rock Island's trackage rights without court approval. However, the district court determined that its orders did not prevent Santa Fe from terminating the Agreement. Specifically, Order No. 248 mandated the abandonment of Rock Island's rail lines but did not cover the Etter-Amarillo trackage, which was not listed in the corresponding appendix. Additionally, Order No. 297, issued after Santa Fe's termination notice, also did not apply. The district court's interpretation of its own orders was upheld, as it is recognized that the court is best suited to interpret its own directives, and there was no evidence of abuse of discretion in this case.

Order No. 1, issued on March 17, 1975, included injunctive language similar to Order No. 297, which TNW claims restricted Santa Fe from terminating the Trackage Rights Agreement. The district court clarified that this order did not prevent termination under contract law principles. Consequently, Santa Fe maintained the right to terminate the Agreement. A bankruptcy trustee assumes the debtor's contracts subject to existing burdens and cannot selectively accept benefits without also accepting burdens, as established in Schokbeton Indus. v. Schokbeton Prods. Corp. The Rock Island trustee thus assumed its contracts with the understanding of Santa Fe's termination rights. Therefore, Santa Fe's termination did not interfere with Rock Island's interests as constrained by Order No. 1; the interest under the Trackage Rights Agreement was always subject to Santa Fe's termination rights.

The district court's judgment favoring Santa Fe's motion for summary judgment and denying TNW’s motion was affirmed. Santa Fe effectively terminated the Agreement as of June 2, 1980, for reasons related to Rock Island's abandonment and default, despite TNW's argument that abandonment could not be a basis for termination. The termination letter explicitly cited default as the reason. Additionally, it was noted that Santa Fe retained the right to terminate irrespective of any receivership or trusteeship of Rock Island.

Order No. 1 aimed to prevent interference with Rock Island's interests from the date of its reorganization approval. Order No. 248, dated June 2, 1980, mandated the abandonment of Rock Island's rail lines, while Order No. 297 extended the restraining language of Order No. 1 indefinitely. The excerpt concludes by reaffirming the principle that a trustee's acceptance of contracts does not negate the pre-existing rights of the other party to terminate.