Robert James Keach, Estate Representative of Post-Effective Date Estate of Montreal, Maine, and Atlantic Railway, Ltd. v. New Brunswick Southern Railway Company, Ltd., et al.

Section 1171(b) of the Bankruptcy Code grants payment priority to unsecured claims in railroad reorganizations if such claims “would have been entitled to priority” in a federal equity receivership. 11 U.S.C. §1171(b). This provision codifies the “six months rule” established in pre-Code railroad receivership cases, which granted a special priority to certain unsecured claims of creditors that provided goods or services necessary to the railroad’s operation, in reliance on payment out of the railroad’s current income, in the six months before the receivership. Fosdick v. Schall, 99 U.S. 235, 252-254 (1879). Under Fosdick, such unsecured claims for operating expenses were entitled to priority in payment, ahead of secured creditors, only if the railroad had diverted income that should have been used to pay such claims to pay secured creditors instead. See id. The question presented, on which the courts of appeals are divided, is: Whether the “six months rule” entitles unsecured claims for necessary operating expenses incurred by a railroad in the six months before bankruptcy to priority of payment if the railroad has not diverted any income away from the payment of such claims to pay secured creditors. (i)