168 F.2d 722 | 3rd Cir. | 1948
Lead Opinion
The pertinent facts relating to these three appeals are clearly and succinctly set out in the opinion and findings of fact of the court below. See 71 F.Supp. 797. In addition thereto more complete descriptions of Engineers Public Service Company and its holding company system will be found in In the Matter of Engineers Public Service Co., 9 S.E.C. 764, 10 S.E.C. 904, and 12 S.E.C. 41 and 268. In view of these reports, no extended recapitulation of facts will be necessary.
The questions presented may be put as follows: (a) Did the Commission properly approve as “fair and equitable” within the meaning of Section 11(e) of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79k (e), cash payments in certain amounts to be made to the preferred stockholders of Engineers Public Service Company; and (b) did the court below err in refusing to approve the plan proposed by the Commission as “fair and equitable”,
Preliminarily it may be stated that after extended hearings the Commission issued a series of orders designed to effect the integration of the Engineers system pursuant to Section 11(b) (1) of the Act. It is unnecessary to deal with these orders and with their disposition in detail.
Reduced to its simplest terms the plan approved by the Commission provides that Engineers shall dissolve
The Commission asserts that it arrived at the amount to be paid in cash for the preferred stocks by the application of the doctrine of equitable equivalents as enunciated by the Supreme Court in Otis & Co. v. Securities and Exchange Commission (The United Light and Power Co.), 323 U.S. 624, 65 S.Ct. 483, 89 L.Ed. 511. It takes the position that it has obeyed the clear mandate of the Act in that it has measured the rights to be surrendered by the preferred stockholders in terms of investment value; that is to say ex the Act which itself necessitated the dissolution of Engineers. Relying on its interpretation of the Otis & Co. case the Commission has disregarded the liquidation provisions of the charter. The Commission in arriving at a value for the preferred stocks relied in large part on the testimony of two experts, Dr. R. A. Badger and Mr. D. C. Barnes, president of Engineers. Dr. Badger prepared a report in which he analyzed the value of the three series of preferred stock comparing them as to fair investment, going concern and 'intrinsic value with stock of five other public .utility holding companies like Engineers, tie testified that he made his -studies, without regard to the plan of divestiture of Engineers required by Section 11 of the Public Utility Holding Company Act. He concluded that the three series of preferreds were worth respectively $107.49, $118.31 and $129.07 per share. He also compared the preferred stocks of Engineers with those of ten operating and holding companies selected on the basis of similarity of earnings’ history with Engineers and found that these stocks had sold during the period examined at an average yield of 4.5%-. Applying this yield to the three Engineers’ preferreds he arrived at values for the three series of $111.11, $122.-22 and $133.33. He reached the conclusion nonetheless that the “investment characteristics of the Company” and the conditions of the money market placed a proper yield for the three series of Engineers preferreds, absent a call price, of 4.6%. In view of the foregoing he expressed the opinion that the investment values of the. three series were respectively $108.70, $119.57 and $130.33. Dr. Badger’s evidence as to values also included a number of other elements, the principal items of which are referred to in the opinion of the court below. See 71 F.Supp. at pages 801, 802. These included the charges and preferred dividends earned, the proportion of obligations to total capitalization, the bpok value of equity per share of preferred, the percent of quick net assets to prior obligations and the times the parent company dividends were earned. Dr. Badger also commented on the “possible permanency of the [general] interest rate” and based his opinion, to a considerable extent, on this factor. These estimates of value were based as will have been observed on the continued existence of Engineers as a “going concern”. Dr. Badger really was testifying as we
The District Court expressly stated that it accepted Dr. Badger’s values and that in the absence of a showing of changed circumstances it would deem them to be applicable at the time of the hearing. The District Judge went on to say, however, -that “It must be conceded * * * that •these values are not controlling because the plan itself does not propose to give these amounts to the preferreds.” The court considered a number of other elements which it designated as “colloquial” equities. It pointed out that “A significant reason why the present preferreds are able to be evaluated at more than their redemption •prices is because of retained earnings over a period of years not paid as dividends to the common stockholders.”, and that “The past sacrifices and contributions of the common contributed significantly to the present value, of the preferreds. * * * ” The court also concluded that the issuing prices and market histories of the preferreds looked toward non-payment of any ■premium, that none of the series of preferreds was initially sold to the public at -prices in excess of $100 per share and that in order to sell the preferreds even at these -prices it was deemed necessary to attach a convertible feature to the $5 series and warrants to the $5.50 series; that there was “no showing” that Engineers in fact received the amounts which the public paid for the various issues; that underwriting fees and “underwriting spreads in vogue at the time” were large. “The important consideration”, said the court, “is not what the preferred security holders paid, but how much the company received for their stock.” The court concluded that Engineers did not receive as much as $98 a share and states that as a matter of “colloquial equity” the preferred stocks should not be paid a premium. The trial court stated that market history ex the conversion and warrant privileges showed an average price “much below $100 per share” and that the importance of the conversion and warrant features is demonstrated by the lower average price of the $6 preferred in comparison with the other two series. The District Judge laid emphasis on the fact that dividends were not paid on the preferreds from July 1, 1933, to July 31, 1936, the accumulated arrearages being paid off in 1936 and 1937. He said: “The market history accordingly not only fails to support the preferred’s claim to a premium, but affords affirmative support to the non-payment of the premium.” The court pointed also to the charter provisions of Engineers, concluding that the liquidation of the company was an involuntary liquidation brought about by the operation of the Holding Company Act, and, while not holding this fact to be determinative in respect to values, nonetheless referred to decisions where, the provisions of the Act having worked a dissolution, courts had treated the charter provisions of the holding companies involved as dis-positive of the issue of whether premiums should be paid.
The court also said, and this represents the greatest difference between the respective approaches of court and Commission to the problem of valuation [71 F.Supp. 802], “I do not consider the argument advanced [by the ’Commission] as to what these series of preferreds would be worth if there were no Public Utility Holding Company Act. I do not think it profitable to consider an argument based on unreality for there is a Public Utility Holding Company Act. Unless one subscribes completely to the doctrine of foreordination, things might always be different from what they are.” While recognizing that there might be more than one road to a fair and equitable plan of reorganization under the Act the court concluded that because the Commission had failed to weigh the factors of divestiture and dissolution as well as the other elements referred to in the court’s opinion the plan did not meet the test of the Act since it was not fair and equitable.
The Commission takes the position before us that “Unless the conclusions of the Commission lack ‘any rational and statutory foundation’ they should not have been disturbed by the court below for the “ ‘fair and equitable’” rule of Section 11(e) * * * [was] inserted by the framers of the act in order to protect the various interests at stake. * * * The very breadth of the statutory language precludes a reversal of the Commission’s judgment save where it has plainly abused its discretion in these matters.”,
The legislative history of the Public Utility Holding Company Act of 1935 throws some light on this vital question. The report of the Senate Committee which reported out the original bill states, “Section 11 provides that plans for the voluntary readjustment of the affairs of holding companies to conform with the section may be presented to the federal courts at any time and that in such cases those courts may exercise in the furtherance of such voluntary plans all the extraordinary powers such courts have been accustomed to exercise when called upon under the Sherman and Hepburn Act[s] [15 U.S. C.A. §§ 1-7, 15 note, 49 U.S.C.A. § 1 et seq.] to effect compulsory corporate readjustments required by the public policy expressed in those aids. * * *. The title provides that during all court processes the SBC will act as the impartial expert economic adviser and administrative assistant to the courts.
The Congressional debates which attended the passage of the Act disclose that again and again members of Congress demanded and received assurances that the plenary jurisdiction and powers of the district courts of the United States would not be diminished or encroached upon by the functions allotted to the. Commission under the law. S. 2796 ?.s originally cast
The interpretation of the Act by the Commission seems also to bear out the ruling of the court below that the district court’s function in respect to the’ or disapproval of plans of reorg; is full, plenary and independent. A chairman of the SEC, Mr. Gansov cell, testifying before the Securities*. committee of the Committee on and Foreign Commerce, House of Re?" sentatives, on “Study of Operations Puf ant to the Public Utility Holding Compa Act of 1935”, p. 873, Part 3, 79th Cong; 2d Sess., 1946, said that the stockholder’s “ * * * new interest [in reorganization] is gaged by his claim under the old security and his treatment must be found by the courts and the Commission to be fair and equitable.” Mr. Purcell also stated in respect to the enforcement of a plan in a district court of the United States that “That district court is * * * required to find under section 11(e) that the plan is fair and equitable, and proper to carry out the provisions of section 11(e) [sic].
The 10th Annual Report to Congress of the- SEC, April 21, 1945, at pp. 91, 92 and 93, states after making reference to the respective functions of the Commission and the district courts, “Thus security holders have the protection of findings as to the
Turning now to the internal evidence contained in the Act itself as to the intent of Congress respecting the functions of a district court of the United States in an 11(e) proceeding, we find that subsection (e) lays upon the Commission in the first instance the duty of finding a plan, as submitted or as modified, “necessary to effectuate the provisions of subsection (b) and fair and equitable to the persons affected by such plan * * *.” The same subsection provides that the court “ * * * shall approve such plan as fair and equitable and as appropriate to effectuate the provisions of this section * * The words employed respecting the respective duties of Commission and court are so alike that we must conclude that Congress intended to lay substantially the same duty on the court in the second instance as it imposed on the Commission in the first. Surely, had Congress intended that the district courts of the United States should exercise only the function of review, other and more appropriate language would have been employed. The duty of determining whether the plan is fair and equitable imposed on the district courts in its field apparently is very similar to that which devolves on the Commission itself within the latter’s own province. We use the word “field” advisedly for of course limitations on the functions of the court in the exercise of its equity powers are im-. posed by the Act. These will be discussed at a later point herein. But one may not presume that the same words employed in a single subsection of a statute have dissonant meanings. It is conceded that the Commission must exercise an independent and plenary judgment in passing on the fairness and equity of the plan. Why then must it not be concluded that it was the Congressional intention that the district courts of the United States should do the same in their own field?
Subsection (e) goes on to employ the phrase that “the court as a court of equity may * * * take exclusive jurisdiction * * * of the company * * * and the assets thereof” for the purpose of effectuating the plan. We do not believe that it was the intention of Congress to cause a district court of the United States to function as a court of equity after it had approved a plan and not to function as a court of equity for the approval or disapproval of the plan. We think that Congress, employed the phrase “as a court of equity” classically, intending to require the district courts in Section 11(e) proceedings to exercise in connection with the approval or disapproval of a plan the traditional powers of a court of equity in deciding that justiciable issue; that is to say, to administer justice in the traditional manner of a court of equity. The history of the law of reorganizations supports this view as will be demonstrated hereinafter.
It is also interesting to observe that the last sentence of subsection (b) of Section 11 provides: “Any order made under this subsection shall be subject to judicial review as provided in* section 24.” The words are apt for creating a review function in the circuit courts of appeals. Contrast the language employed in subsection (e) which we have quoted above. Section 24(a) of the Act which, as indicated, sets up a means of reviewing the orders of the Commission by the circuit courts of appeals, provides that “The findings of the Commission 'as to the facts, if supported by substantial evidence, shall be conclusive.” 15 U.S.C.A. § 79x(a). This sentence or its equivalent is notably absent from Section 11(e).
It must be pointed out also that the Section'11(e) court may hear the application for approval of the plan only “after notice and opportunity for hearing” to those who may be affected by it. It is necessary therefore that notice be given in the proceeding to all security holders who may be affected in order that they may have the opportunity to be heard. Many, if not most, of these persons will not have appeared before the Commission. It was the manifest intention of Congress to give all persons who might be affected by the
It seems improbable to us that Congress intended that the district courts ' of the United States should be limited to the function of mere review under the Public Utility Holding Company Act, the only federal reorganization statute by the terms of which security holders are not permitted to vote their approval or disapproval of a proposed plan of reorganization and to prevent its operation if the holders of the requisites amounts of the securities affected are not in favor of it.
The history of the law of reorganizations tends to support the view that a Section 11(e) court must function as an equity reorganization tribunal. Equity receiverships first were employed to effect corporate reorganizations. The powers of the courts of chancery were exercised to make certain that creditors and security holders were treated fairly and equitably. The powers of the court were in nowise circumscribed.
If the company to be reorganized pursuant to the provisions of Chapter X is a public utility holding company within the purview of the Public Utility Holding Company Act the proposed plan of reor
In providing means for the reorganization of railroads Congress in enacting Section 77, subs, d and e, 11 U.S.C.A. § 205, subs, (d) and (e) provided that the Interstate Commerce Commission should certify the plan of reorganization with a transcript of the proceedings before it and its order to the appropriate district court which, after notice to the parties in interest, and hearing, shall approve the plan if, inter alia, the court is satisfied that the plan is “fair and equitable * * Subsection d provides that the plan shall not be approved by the court unless it has first been approved by the Commission. We are of the opinion that Congress intended the district courts of the United States, within the limitations of the statute, to function as equity reorganization courts. Though the Commission must make the primary determinations respecting the plan, including in particular those relating to valuations of railroad securities, the court must exercise its own independent judgment in approving or disapproving the plan whether the court’s rulings relate to value or to some other pertinent subject. See In re Erie R. Co., D.C., N.D.Ohio, 37 F.Supp. 237, 243-245, affirmed, 6 Cir., 133 F.2d 730, certiorari denied 320 U.S. 748, 64 S.Ct. 51, 88 L.Ed. 444. In Palmer v. Massachusetts, 308 U.S. 79, 87, 60 S.Ct. 34, 38, 84 L.Ed. 93, the Supreme Court, by Mr. Justice Douglas, said that the judicial process in bankruptcy proceedings under Section 77 is brigaded with the administrative process of the Commission. The Court also stated that “ * * * the whole scheme of § 77 leaves no doubt that Congress did not mean to grant to the district courts the same scope as to bankrupt roads that they may have in dealing with other bankrupt estates.” We think that the limitations imposed by the statute are largely procedural, operative in the respective fields specified by Congress to Commission and court, and do not substantially circumscribe the general equity jurisdiction of the reorganization tribunal.
Insofar as we are aware the Commission in this circuit prior to the instant case has not taken the position that a Section 11(e) court (any proceeding under Section 77B or Chapter X aside) is not an equity reorganization tribunal but serves only as a court of review. The instant case aside the learned District Judge has passed on twenty-seven reorganization plans brought to the District Court of Delaware by the Commission pursuant to Section 11(e).
There are decided cases which look the other way and these are entitled to great consideration. See Lahti v. New England Power Ass’n, 1 Cir., 160 F.2d 845, 858, and Massachusetts Mutual Life Ins. Co. v. S. E. C., 8 Cir., 151 F.2d 424, 430, affirming In re Laclede Gas Light Co., D.C. E.D.Mo., 57 F.Supp. 997, 1004. In the Laclede case Judge Hulen said, “The Corn-
The decision of the Supreme Court in the second Chenery case, supra, as has been indicated, is heavily relied on by the Commission. But that decision must be read in the light of the circumstances of the cited case. The proceeding was under Section 24(a) of the Public Utility Holding Company Act. While reference was made to Section 11(e) in the course of Mr. Justice Murphy’s opinion, 332 U.S. at page 208, 67 S.Ct. at page 1583, it was not held that the proviso of Section 24(a), “The findings of the Commission as to the facts, if supported by substantial evidence, shall be conclusive.”, should be read into Section 11(e). The Supreme Court was not passing in any way on the powers and duties of a Section 11(e) court. In the Chenery case the Court had before it questions relating to a rule of conduct prescribed by the Commission in the course of “[its] ordinary administrative action”. The Court stated that its duty of examination is at an end “ * * * when it becomes evident that the Commission’s action is based upon substantial evidence and is consistent with the authority granted by Congress- * * *” 332 U.S. at page 207, 67 S.Ct-at page 1582. The Chenery decision in our opinion cannot be deemed to be controlling in the case at bar.
We are of the opinion that a Section 11(e) court must exercise its full and independent judgment as to the fairness and equity of the plan. In stating this we do not mean to imply that Congress intended to grant a Section 11(e) court the same full and untrammeled scope that a court óf bánkruptcy would have in a Chap
In the light of the foregoing we cannot hold, as the Commission contends we must, that unless the conclusions of the Commission lack rational or statutory foundation they may not be disturbed by the Section 11(e) court, or that a reversal of the Commission’s judgment by the court may not be effected save where the Commission has plainly abused its discretion. We conclude that it was the duty of the court below to function as an equity reorganization tribunal within the limitations prescribed by the Act. The findings and conclusions of the Commission were not binding upon the learned District Judge, though, as was proper, he treated them with respect. He weighed the numerous elements involved in the case, albeit on his own scales, and in the exercise of his independent judgment, arrived at the conclusion that the plan was not fair and equitable. The examination made by the District Court of the relevant factors was careful and far-reaching. The District Judge attached substantial weight to elements or factors which the Commission apparently did not deem to be of importance. For example, he laid emphasis on the market and dividend histories of all the. securities and the losses which were indubitably occasioned to the holding company enterprise by the sale of securities from Engineers’ portfolio because of the divestitures required by the Act. Neither the Commission nor the court, in what we consider to have been a proper application of one of the principles enunciated by the Supreme Court in Otis & Co. v. S. E. C., (The United Light & Power Co. case) 323 U.S. 624, 637, 65 S.Ct. 483, 89 L.Ed. 511, treated the charter provisions of Engineers as dispositive of the issues presented. While the court deemed the liquidation of Engineers to be an involuntary one and pointed to decisions
The reasoning which moved the Commission is not as plain as it might be. But we think it is clear that it did not give any substantial consideration to the future earning power of Engineers and its subsidiaries which the Supreme Court has held is one of the fundamental tests for reor
The anomaly of the Commission’s general position is made all the more apparent, we think, by its failure to consider the substantial losses which occurred to Engineers by virtue of divestitures compelled by the Act. The loss in Puget Sound Power & Light Co. stock will serve as an example. The Commission allowed to Engineers only 3% of Puget Sound’s new common stock in exchange for 99'.3% of the old common stock. The allocation was based on the Commission’s determination that the future earning power of Puget Sound available for the stocks would lie somewhere between $2,657,000 and $3,083,000. See Puget Sound Light & Power Co., 13 S.E.C. 226, 243-244. The net profits from the stock of Puget Sound in 1946 were $5,325,320 and for the twelve months ending June 30, 1947, were $5,067,410.
The selection of possible though varying techniques is for the Commission in the exercise of its expert administrative judgment. But whatever technique is chosen it must be employed consistently throughout the entire operation of valuation. We do not say the Commission must approach the problem intra the Act or ex the Act as the Commission purports to have done in the instant case. Either course consistently followed could, we think, lead to just and appropriate valuations. No particular, specific approach is to be nailed to the Commission’s head. The Commission must, however, approach the problem of valuation with a full view of all the pertinent factors employing the same scales and the same measure throughout.
In conclusion upon this point we state that in our opinion the Commission in attempting to apply the “investment value” test to the Engineer’s preferreds, even to the limited extent hereinbefore indicated, has misunderstood the principle of “equitable equivalents” enunciated by the Supreme Court in the Otis & Co. case. We can perceive no reason why the doctrine of equitable equivalents cannot include within its ambit cash for securities as well as securities for securities. Perhaps, strictly speaking, cash is not an equitable .equivalent for securities. But cash certainly may be an adequate recompense for the security relinquished and if it be a just recompense, the exchange will be equitable. In the Otis & Co. case the Supreme Court held that a distribution of assets might be made between different classes of securities without dollar valuation if each security holder received the equitable equivalent of what he had surrendered. 323 U.S. at pages 639, 640, 65 S.Ct. at pages 490, 491. We do not understand, however, that the principle of the Otis & Co. case would preclude giving the security holder money in lieu of his security if the cash which he would receive would be just recompense for the security which he would give up. We conclude, therefore, that the doctrine of equitable equivalents may properly be applied where money is to be given for securities and where securities are to be allocated for securities as in the instant case. The difficulty in sustaining the Commission’s position in respect to “investment value”, even insofar as the Commission has applied that value, lies in the fact that investment value is and can be only one of a series of factors to be used in arriving at equitable equivalents. We conceive that the Commission could make a finding under certain circumstances that investment value was the equitable equivalent to the security holder. The Commission in the instant case, however, has not made such a finding and we do not believe that such a finding could be supported on the present record. In determining equitable equivalents the Commission must weigh all pertinent factors to the end that the security holder may receive as nearly as may be the equivalent of that which he is giving up. All pertinent factors and all substantial equities must be considered by the Commission whether equitable equivalents are to be reached by the approach ex the Act or the approach intra the Act. The new doctrine of investment value presently urged by the Commission may not be substituted for the doctrine of equitable equivalents enunciated in the Otis & Co. decision.
For the reasons stated we conclude that the District Judge did not err when he found that the plan as submitted by the Commission was unfair and inequitable.
Though a district court of the United States sitting pursuant to the provisions of Section 11(e) may reject a plan, it cannot value the securities, find equitable equivalents therefor and substitute its own estimates for those of the Commission requiring the plan as amended by it to be carried out. To put the matter briefly, a district court may reject but not amend the plan. The court below, therefore, erred in one particular. It entered an order approving and enforcing the plan as amended by it. It was without power to do this. The provisions of Section 11(e) make it clear that the Commission in the first instance must approve the plan and find it to be fair and equitable. If, as here, the district court disagrees with the conclusion of the Commission that the plan is fair and equitable, it must refuse to approve the plan and “remand” the record to the Commission for further and appropriate action by it.
The action which the Commission may take will, of course, be limited by the fact that with its approval, evidenced by its opposition to the appellant Streeter’s motion to stay which this court denied, the plan has been carried into effect, with the exception of the payment of the premiums which the district court disapproved. Under the escrow agreement which the Commission approved funds which are sufficient to pay all or any part of these premiums have been withheld from distribution, however, and the escrow agreement accordingly delimits the area in which the plan to be approved by the Commission and district court must fall. The problem is and will remain, until its disposition by the Commission, one of valuation of the securities of Engineers, viz., the preferreds and the common.
The escrow provisions of the plan are proper in our opinion. The objections asserted thereto need not be discussed in this opinion.
The decree of the court below is vacated and the cause is remanded with the direction to enter an order disapproving the plan as not being fair and equitable within the purview of Section 11(e) of the Public Utility Holding Company Act, and to return the record to the Commission to the end that it may take such action as the facts and the law may require.
Engineers filed a petition for review of certain of tlie orders of divestiture and integration in the United States Court of Appeals for the District of Columbia which reversed the Commission’s orders in part. See Engineers Public S. Co. v. Securities and Exchange Com’n, 78 U.S.App.D.C. 199, 138 F.2d 936. Both Engineers and the Commission filed petitions for writs of certiorari to the Supreme Court. Writs were granted. See Engineers Public Service Co. v. S.E.C., 322 U.S. 723, 64 S.Ct. 1273, 88 L.Ed. 1561. Disposition was not had because of the lack of a quorum. In the meantime Engineers disposed of the properties which were the subject of the Commission’s orders. On October 20, 1947, the Supreme Court dismissed the appeals as moot. See 332 U.S. 788, 68 S.Ct. 96.
As follows:
“III. Preference on Liquidation, etc. In the event of liquidation, dissolution or winding up of this Corporation or any reduction of its capital stock, resulting in .any distribution of its assets to its stockholders, the holders of the preferred stock ■of each series shall be entitled to receive, ■for each share thereof, an amount equal to $100, together with all dividends ac-rued or in arrears thereon, plus, in case ■such liquidation, dissolution or winding up or reduction shall have been voluntary, -the fixed redemption premiums for such .series, if any, before any distribution of its assets shall be made to the holders of the common stock; but the holders of' the preferred stock shall be entitled to no further participation in such distribution. * * * A consolidation or merger of this Corporation with any other corporation or corporations shall not be regarded as a liquidation, dissolution or winding up of this Corporation within the meaning of this Paragraph m, provided such consolidation or merger does not substantially impair the rights and the preferences of the preferred stock.
The applicable charter provisions are as follows:
“IV. Redemption and Repurchase. The Corporation may, at its option, at any time or from time to time, redeem the whole or any part of the preferred stock or of any series thereof, at a price for each share thereof equal to $109, plus the fixed redemption premium therefor, if any, together with the amount of any dividends accrued or in arrears thereon. * * * This Corporation may also from time to time repurchase shares of its preferred stock at not exceeding the price or prices at which the same may be redeemed. * * * ”
The dissolution has in fact taken place and the directors are constituted trustees pursuant to the provisions of Section 43 of the Delaware Corporation Law. Rev. Code of Delaware, 1935, Section 2075.
See “The Plan”, Exhibit C attached to the application of the Commission.
The court cited: In re Consolidated Electric & Gas Co., D.C.Del., 55 F.Supp. 211; In re North Continent Utilities Corp., D.C.Del., 54 F.Supp. 527; City National Bank & Trust Co. of Chicago v. S.E.C. and North American Light & Power Co., 7 Cir., 134 F.2d 65; New York Trust Co. et al. v. S.E.C., 2 Cir., 131 F.2d 274 and In re Standard Gas & Electric Co., D.C.Del., 59 F.Supp. 274.
For references contained in this paragraph, see 71 F.Supp. pp. 801, 802.
As follows:
“37. Engineers sustained substantial losses on many of the properties sold by it in compliance with the requirements of Section 11(b) (1) of the Act and the Commission’s divestment Orders thereunder. The largest of such losses was with respect to its investment in Puget Sound Power & Light Company which, after being drastically reduced in a Section 11(e) reorganization under the Holding Company Act, was disposed of in compliance with the Commission’s divestment Orders, for a total consideration of $774,475, as compared with a cost to Engineers of $34,006,000. The book loss on this investment was thus more than $33,000,000. A formal offer of proof was made during the proceedings before the Court to establish that the equity owned by Engineers in Puget Sound prior to the recapitalization would presently have a cash value of $10,000,000. It is not necessary for present purposes to determine this amount with exactitude. The subsequent increases in the earnings of Puget Sound, concerning which the Court takes judicial notice (Moody’s Public Utility Manual [1946] p. 1081), over the amount estimated by the Commission for reorganization purposes (13 S.E.C. 226, 243), and the increase in market prices for utility common stocks which occurred subsequent to 1944 (to which the Securities and Exchange Commission makes reference in its Twelfth Annual Report to Congress, at p. 46) make plain that Engineers’ investment in Puget Sound came to have a realizable cash value substantially higher than the amount realized by Engineers under the circumstances referred to above. Substantial book losses were also sustained by Engineers on the-sale of its investments in Western Public Service Company of Maryland, of Missouri Service Company and Northern-Kansas Power Company, of Savannah Electric & Power Company, and of' others.
“In the case of El Paso Natural Gas. Company, with which Engineers also was ordered by the Commission to sever its. relationship, Ehgiheers held a valuable-option on which it managed to realize a book profit; but subsequent to compliance with the Commission’s divestment Order the market price of the El Paso Natural Gas Stock divested by Engineers, rose by more than $4,000,000.”
As follows;
“51. The record establishes that the-values attributed by Badger to the Engineers preferred stocks, largely depend not only on market and economic conditions, but also on continuance of current money rates which were at the time of Badger’s study concededly the lowest in the country’s history; that such money rates in turn largely depend on continuance of governmental financial policies including ‘pegging’ of the market on government securities; and that there is and can be no assurance that such policies will not be modified; nor can it be foretold how soon such modifications may take place. The extremely low money rates which resulted in Badger’s finding that the preferred stocks of Engineers have an ‘investment value’ greater than $100 per share, largely reflect artificial factors which are clearly subject to changes at any time and may well be of purely transitory character.”
Brief for the Securities and Exchange Commission, p. 17.
Emphasis has been added at this and all later points of the opinion.
The original bill suffered many . changes and vicissitudes during its course through Congress but it should bo notes! that the provisions of Section 11(e) remained substantially unchanged. See 2796, 74th Cong., 1st Sess. i Produced by Senator Wheeler on i (Calendar day May 9), 1985.
It is probable that the “(e)” is a typographical error and the reference was to subsection (b). ;
For classic examples of the application of tests by a court of equity see the decisions of the Court of Chancery of Delaware in Hauer v. Appalachian Gas Corp., 19 Del.Ch. 283, 167 A. 839, and in Eastern States Public Service Corp. v. Atlantic Public Utilities, Inc., 17 Del. Ch. 338, 156 A. 214.
S.R.1916, 75th Cong. 3d sess. p 30, states that “Section 172 provides the courts with the administrative assistance of the Securities and Exchange Commission in the complex and difficult task of examining plans of reorganization. It contemplates that after the hearings provided in 169 or 170 the number of practicable plans will be reduced to one or two in number. At this stage it is required that the court shall in cases where the debtor’s scheduled indebtedness exceeds $3,000,000 refer the plan or plans which it regards as worthy of consideration to the Securities and Exchange Commission for examination and report. In cases involving a scheduled indebtedness which is less than $3,000,000, such plans may be referred to the Commission. In either case the Commission’s reports are advisory only. There is no division of jurisdiction. Ultimate approval or disapproval of plans is left solely with the judge.”
S.E.C. cases decided by opinion by Judge Leahy, sitting in Section 11(e) proceedings :
American Gas & Power Co., D.C., 55 F.Supp. 756; Homewood v. Standard Power, D.C., 55 F.Supp. 100; Illinois Iowa v. North American Co., D.C., 49 F. Supp. 277; Standard Power & Light, D. C., 48 F.Supp. 716; United Public Utilities, D.C., 52 F.Supp. 975; North Continent Utilities, D.C., 54 F.Supp. 527; Consolidated Electric, D.C., 55 F.Supp. 211; United Gas Corporation, D.C., 58 F.Supp. 501; United Light & Power, D. C., 51 F.Supp. 217, Affirmed 3 Cir., 142 F.2d 411, Affirmed 323 U.S. 624, 65 S. Ct. 483, 89 L.Ed. 511; Standard Gas & Electric, D.C., 59 F.Supp. 274, reversed 3 Cir., 151 F.2d 326; Standard Gas & Electric, D.C., 63 F.Supp. 876. On remand Central States Power & Light, D. C., 58 F.Supp. 877; North Continent, D. C., 61 F.Supp. 419; Central & South West Utilities Co. and American Public Service, D.C., 66 F.Supp. 690; Interstate Power Co. and Ogden Power Corporation, D.C., 71 F.Supp. 164; Community Gas and Power Co. and American Gas and Power Co., D.C., 71 F.Supp. 171; In re Cities Service Co., D.C., 71 F.Supp. 1003; In re Illinois Power Co., North American light & Power, The North American Co., D.C., 74 F.Supp. 317; Central States Power & Light Corp., Central States Utilities Corp., Ogden Corp., D.C., 74 F.Supp. 360; S.E.C. cases decided without opinion by Judge Leahy: In the Matter of The United Corporation, et al.; In the Matter of Columbia Oil & Gasoline Corp. and Columbia Gas & Electric Corp. (C.A. 288); In the Matter of Columbia Oil & Gasoline Corp. (C. A. 280); In the Matter of Republic Service' Corporation and subsidiary companies; In the Matter of American Utilities Service Corporation; In the Matter of Peoples light & Power Company and Texas Public Service Co.; In the Matter of Crescent Public Service Co., Central Ohio Light & Power Co., Colorado Central Power Co., and Empire Southern Service Co.; In the Matter of East Coast Public Service Co., Virginia East Coast Utilities, Inc., Tidewater Electric Service Co.; In the Matter of North American Gas & Electric Co.
The United Light & Power Company case. Decided by the Supreme Court sub. nom. Otis & Co. v. S.E.C., 323 U.S. 624, 65 S.Ct 483, 89 L.Ed. 511.
See the cases cited in note 6 supra. See also City National Bank & Trust Co. v. S.E.C., 7 Cir., 134 F.2d 65; Massachusetts Mutual Life Insurance Co. v. S. E.C., 8 Cir., 151 F.2d 424, certiorari denied 327 U.S. 795, 66 S.Ct. 817, 90 L. Ed. 1022; In re Standard Gas & Electric Co., 3 Cir., 151 F.2d 326; and New Fork Trust Co. v. S.E.C., 2 Cir., 131 F.2d 274, certiorari denied 318 U.S. 786, 63 S. Ct. 981, 87 L.Ed. 1153.
See Moody’s Public Utility Manual (1947) at p. 53 and Suppl. Vol. 19, at p. 1914.
Judge Leahy’s opinion is entitled to especial weight by virtue of his familiarity and experience with Section 11(e) proceedings and plans of reorganization under the Act. Sec R.F.C. v. Denver & R.G.W.R. Co., 328 U.S. 495, 533, 66 S.Ct. 1282, 90 L.Ed. 1400, and Rule 52, F.R. C.P., 28 U.S.C.A. following § 723c.
We are informed by the Chief of the Bureau of Procedural Studies and Statistics of the Administrative Office, United States Courts, that up to February 11, 1948, the Securities and Exchange Commission had filed 63 petitions in the District Courts of the United States, seeking approval of plans of reorganization pursuant to Section 11(e) of the Public Utility Holding Company Act and that 27 of these had been filed in the District Court of the United States for the District of Delaware. See also note 16 supra. Approximately forty-two percent of all plans of reorganization submitted by the Commission under Section 11(e) to the District Courts of the United States, therefore, have been submitted to Judge Leahy in the court below.
Rehearing
On Petitions for Rehearing and Answers Thereto
Petitions for rehearing, answers thereto, and cross-petitions for rehearing have been filed in these cases. The petition of the Commission by Note 1 asserts that if the Commission is bound by the District Judge’s determination “as to amount” to be paid to the preferred stockholders of Engineers “no remand to the Commission would be necessary, because the Commission [by its amendatory order of February 11, 1947] has already contingently approved an alternative allocation of cash to preferred stockholders at the amount of the liquidation preference if as a result of the processes of review in the District Court and on appeal therefrom this should be judicially determined fair and equitable.” The cross-petitions assert that the proceedings should not be remanded to the Commission for a somewhat different reason, specifically because by the amendatory order referred to the Commission approved payment to the preferred stockholders of $100 per share, and of any additional amounts which might be
We are not unmindful of the delay, perhaps of short duration, which necessarily must ensue upon the return of the record to the Commission pursuant to our decree but we are of the opinion that neither the Commission, nor the District Court, nor this court possesses the power to waive the provision of Section 11(e) providing for approval of a plan of reorganization as fair and equitable by the Commission and by the District Court. Moreover, we cannot treat the Commission’s amendatory order of February 11, 1947 or its approval of the escrow agreement as a rejection of the role imposed on the Commission by Congress. The correctness of our position in this regard is demonstrated by the fact that the amendatory order of the Commission provides that the escrow agent may make payment to the preferred stockholders only when the order of the District Court has become final and not subject to appeal. What the Commission intended to effect by the order was nothing more than the establishment of a means for expediting the execution of the plan of reorganization when the approval required by the statute had been attained.
The Commission approved the plan as amended by it, requiring amounts equivalent to redemption premiums to be paid to the preferred, finding this to be fair and equitable. Thereafter it presented the plan to the District Court. The District Court found the plan to be unfair and inequitable and rejected it. We affirmed that decision for the reasons stated in our opinion. The Commission must now proceed to a reconsideration of the problems presented in the light of our opinion or procure the review thereof by the Supreme Court.
The loss which will occur to the common stockholders by reason of the remand may be lessened to some extent by appropriate investment of the escrow fund. An order will be entered authorizing the court below to take appropriate action on an application for investment of the fund, if such be made to it.
Other questions raised by the petitions for rehearing do not require discussion. Orders will be entered denying the prayers of the petitions and of the cross-petition.
