In the Matter of the NEW YORK, NEW HAVEN AND HARTFORD RAILROAD COMPANY, Debtor.
The CHASE MANHATTAN BANK (N. A.), as Trustee under the Debtor's General Income Mortgage dated July 1, 1947, the Committee for the Holders of the Debtor's First and Refunding Mortgage Bonds and Oscar Gruss & Son, Appellants,
Richard Joyce SMITH and William J. Kirk, as the Trustees of the Debtor's Property, Appellees.
No. 387.
Docket 31082.
United States Court of Appeals Second Circuit.
Argued May 2, 1967.
Decided May 29, 1967.
Joseph Schreiber, Wilkie Bushby, New York City (Dewey, Ballantine, Bushby, Palmer & Wood, New York City), for Chase Manhattan Bank (N.A.) as Corporate Trustee under Debtor's General Income Mortgage.
Myron D. Isaacs, New York City (Nathan D. Lobell, New York City, of counsel), for Oscar Gruss & Son.
Lester C. Migdal, New York City (Migdal, Low, Tenney & Glass, New York City, Lawrence W. Pollack, New York City, of counsel), for New York, New Haven & Hartford Railroad Co. First Mortgage 4% Bondholders Committee.
Joseph Auerbach, Arthur Blasberg, Jr., Robert G. Bleakney, Jr., Thomas E. Weesner and Morris Baker, Boston, Mass. (Robert W. Blanchette, James W. Grady, New Haven, Conn., and Sullivan & Worcester, Boston, Mass., of counsel), for appellees.
Before WATERMAN, FRIENDLY and HAYS, Circuit Judges.
FRIENDLY, Circuit Judge:
This appeal from an order of Circuit Judge Anderson, who has continued to preside over the reorganizаtion proceedings of The New York, New Haven and Hartford Railroad Company ("New Haven") under § 77 of the Bankruptcy Act in the District Court for Connecticut, is another facet of the growing controversy between the New Haven's Trustees and certain of its security holders, see Oscar Gruss & Son v. United States,
During the pendency of the Pennsylvania-New York Central merger proceedings the Trustees and the two companies had been negotiating terms for the New Haven's inclusion. The results were formalized first in a Memorandum dated February 5, 1965 and later in a definitive agreement dated April 21, 1966 and amended October 4, 1966. This provided for the sale of substantially all the property of the New Haven to Penn Central free and clear of all liens and encumbrances with certain minor exceptions. The consideration was to be 950,000 shares of Penn Central whose market price at the time of the argument of this appeal was around $60 per share, $8,000,000 in cash, and $23,000,000 in divisional mortgage bonds,2 all subject to adjustments which the contract set out in detail.3
In September 1966, the Trustees filed a further petition with the District Court. They recited the background we have narrated, the New Haven's large and growing deficits, and thе insufficiency of internally generated cash to meet demands. In the Trustees' view inclusion of the New Haven's estate in Penn Central afforded "the only practicable means for reorganization of the Debtor that is consistent with the best interest of the public and of all parties interested in the Debtor's estate; and should be effected." They submitted that operations should be continued so long as such inclusion was possible; that proceedings tо secure inclusion on the basis of the Amended Agreement should be promptly instituted by them; and that they should also file a plan of reorganization of a nature summarized in an Annex.
This plan departed from the usual form in providing for two discrete steps. The first step consisted of the sale of the New Haven's assets to Penn Central as provided in the Amended Agreement; only after consummation of this step would the Trustees file a specification of the terms to be accorded security holders by way of amendment. The Trustees indicated also that "in order to terminate as soon as possible the drain on the Debtor's assets from continued operation," their plan would request the Commission to find that "consummation of the first step," i. e., sale of the New Haven to Penn Central under the terms of the agreement, would not adversely and materially affect the interests of any class of creditors or stockholders within the meaning of § 77(e),4 and that accordingly no vote of security holders would be required before carrying out this step; upon certification to this effect by the Commission, the Trustees would request the reorganization court to affirm this finding and to confirm the first step, which they would then consummate. The Trustees prayed that the court authorize them to proceed in line with their petition, to make necessary expenditures for the services of experts and others, and to find that inclusion of the New Haven's estate in Penn Central afforded the only practicable means of reorganization consistent with public and private interests and should be effected, and that operations should continue so long as this was possible of achievement.
The three appellants here, the Chase Manhattan Bank as Trustee under the New Haven's General Income Mortgage, a Committee fоr Holders of the Debtor's First and Refunding Mortgage Bonds, and Oscar Gruss & Son, holder of some $10,500,000 principal amount (approximately 14%) of such bonds, filed answers opposing in somewhat differing respects the relief sought by the Trustees. After a hearing at which evidence was taken and argument heard, Judge Anderson signed an order substantially in a form distributed by the Trustees' counsel at the opening of the hearing. This was narrower than the petition in some respects and broаder in others. It found that inclusion was "a" rather than "the only" practicable means etc.; it added to the finding as to continued operation a proviso that this was "without prejudice to the right of any party upon a showing of changed circumstances to seek a reconsideration thereof";5 it included a finding that the plan of reorganization proposed by the Trustees "constitutes a plan of reorganization within the provisions of Section 77 of the Bankruptcy Act"; and it embodied a finding that the propriety of the procedures proposed by the Trustees had been sufficiently established, prima facie, to justify the expenditures required. The ordering paragraphs authorized the Trustees to file their plan to make expenditures necessary to process it, and to comply with orders of the Commission in the Penn Central case or providing for the inclusion of the properties of the New Haven in Penn Central, subject to the court's reservation of jurisdiction to pass upon all such matters as might be necessary under § 77. The appeal is from that order.
Chase Manhattan mounts a series of attacks on the Trustees' proposal and the order authorizing its execution. It says that proposing only one step of a plan while leaving the rest in abeyance flouts the directions of § 77(b) that a plan of reorganization "(1) shall include provisiоns modifying or altering the rights of creditors generally, or of any class of them, secured or unsecured, either through the issuance of new securities of any character or otherwise," "(4) shall provide for fixed charges * * * in such an amount that, after due consideration of the probable prospective earnings of the property in light of its earnings experience and all other relevant facts, there shall be adequate coverage of such fixed charges by the probable earnings available for the payment thereof"; and "(5) shall provide adequate means for the execution of the plan * * *." It urges that, faced with so incomplete a plan, neither the Commission nor the reorganization court can carry out the duties imposed by § 77(d) and (e) to find that it "complies with the provision of subsection (b) of this section, is fair and equitable, affords due recognition to the rights of each class of creditors and stockholders, does not discriminate unfairly in favor of any class of creditors or stockholders, and will conform to the requirements of the law of the land regarding the participation of the various classes of creditors and stockholders." Still more importantly Chase Manhattan strenuously objects to the attempt to avoid a vote by anyone until after the sale is consummated. It argues with much persuasivenеss that the provision in § 77(e) for dispensing with the vote of a class of creditors on a finding by the Commission and the court "that the interests of such class of creditors will not be adversely and materially affected by the plan," when read in context refers to situations where their interests are left undisturbed, e. g., by preservation of their liens on the debtor's property or by full satisfaction in cash,6 and that the Trustees in effect are asking the judge to utilize the "cram-down" clause in § 77(e)7 without the enlightenment of a vote. See St. Joe Paper Co. v. Atlantic Coast Line R. R.,
The Trustees answer that however such arguments might stand in the usual case, they fail to take account of the special problems of the New Haven, which during the trusteeship has operated at staggering losses, has procured enough cash for its necessities only through repeated rescue opеrations by the states it serves and the United States, and in their view cannot continue as an independent railroad even without passenger service. While pointing out that the second step of their plan will contain further and final provisions contemplated by the mandatory clauses of § 77(b), they say that the first step of the plan as proposed sufficiently meets these requirements: the rights of creditors are modified or altered within the meaning of clause (1) by being transferred from the New Haven's railroad property to the proceeds of the sale; the thrust of clause (4) is to guard against fixed charges that are unduly high,8 not to require fixed charges by a railroad which will simply distribute the proceeds of a sale; and their plan does provide adequate means for execution. They cite cases authorizing the sale of wasting assets in Chapter X proceedings, notably In re V. Loewer's Gambrinus Brеwery Co.,
Appellants in reply distinguish the Loewer's Gambrinus and similar Chapter X cases on the basis that these dealt with perishable рroperty, which they insist the New Haven would not be if only it were freed from the incubus of passenger operation or from public service altogether, and that the sales, in Loewer's Gambrinus to the highest of three bidders, were thus clearly the most advantageous financial arrangement for the creditors whereas sale of the New Haven to Penn Central may not be. They point out also that § 116(3), unlike § 77(o), does not require that a sale be made in aid of a reorganizаtion.
Interesting and significant as these issues are, we think decision of them at this juncture would be premature. The Trustees' Plan is simply a suggestion to the Commission, the making of which inflicted no legal injury on the appellants. "Under § 77 the Commission is the chief architect of any plan of reorganization." St. Joe Paper Co. v. Atlantic Coast Line R. R., supra,
Appellants are on solid ground, however, in arguing that if we should simply approve the order as entered, the Commission might be left with the misapprehension that we had endorsed the validity of the Trustees' two-step plan without a vote on the first step, and, if the Commission were to act on that basis, the District Court and this court might feel obliged to apply all the findings as the law of the case. The order the Trustees persuaded the judge to sign went far beyond their necessities. All they needed was authority to spend money in initiating proceedings befоre the Commission under § 5(2) (d) of the Interstate Commerce Act and § 77 of the Bankruptcy Act and to keep operating the railroad in the meanwhile; there was no occasion to involve Judge Anderson or us in an advisory opinion to the Commission on legal issues that may never arise. Accordingly we direct that the order be modified to read in the form annexed as an Appendix; as so modified, it is affirmed. No costs.
APPENDIX
ORDER AUTHORIZING TRUSTEES TO FILE WITH THE INTERSTATE COMMERCE COMMISSION A REORGANIZATION PLAN WHEREBY AN INCLUSION OF SUBSTANTIALLY ALL THE PROPERTIES OF THE DEBTOR IN THE PENNSYLVANIA NEW YORK CENTRAL TRANSPORTATION COMPANY WILL BE EFFECTED BY A SALE THEREOF
The petition of the Trustees for Order No. 404 herein having been duly noticed in accordance with the Order of Notice of this Court dated September 13, 1966; having come on for hearing on October 10, 1966; all parties in interest having been heard or given opportunity to be heard at said hearing; and the Court, being duly advised in the premises, finding as follows:
(a) The inclusion of the Debtor's estate in Pennsylvania New York Central Transportation Company (Penn-Central), as provided by the Interstate Commerce Commission (Commission) in its order of April 6, 1966, in Finance Dockets Nos. 21989 and 21990, may afford a practicable means for reorganization of the Debtor; and
(b) Under the present circumstances, railroad operations should be continued as long as such inclusion appears to afford a practicable means for a reorganization of the Debtor, provided, however, that this finding is made without prejudice to the right of any party, for good causе shown, to seek reconsideration thereof:
It is ordered, adjudged and decreed that:
1. The Trustees be, and they hereby are, authorized to file with this Court and the Commission the Trustees' Plan, with terms and provisions substantially as provided in Annex 1 to their petition, but in such detail as they consider necessary or appropriate in order to provide fully for the objectives set forth in Annex 1;
2. The Trustees be, and they hereby are, authorized to employ experts and other persons and to make exрenditures to prosecute the proceeding in Finance Dockets Nos. 21989 and 21900 for the inclusion of the Debtor in Penn-Central and the proceeding to be initiated by them before the Commission for the approval of a plan under Section 77 of the Bankruptcy Act, provided, however, that this Court hereby reserves jurisdiction to pass upon such expenditures as provided in the Trustees' petition;
3. The Trustees be, and they hereby are, authorized to take such steps as they deem necessary or appropriate or desirable in order to comply with and carry out the terms of the order dated April 6, 1966 of the Commission in Finance Dockets Nos. 21989 and 21990, and of such further orders as the Commission may enter therein, or in the proceeding to be initiated by the Trustees for the approval of a plan under Section 77 of the Bankruptcy Act, provided, however, that this Court hereby reserves jurisdiction to pass upon all such matters as may be necessary in accordance with Section 77 of the Bankruptcy Act.
Notes:
Notes
"8. The Pennsylvania New York Central Transportation Company shall be required to include in the transaction all the New York, New Haven, and Hartford Railroad Company — the inclusion of passenger operations being subject to the findings and determinations of the Commission as set forth in Finance Docket No. 23831 issued simultaneously with this report — uрon such fair and equitable terms as the parties may agree subject to the approval of the Bankruptcy Court and the Commission. Within 6 months after the date this report is served, the parties shall file with the Commission for its approval, a plan for such inclusion. In the event the parties are unable to reach an agreement (and subject to approval by the Bankruptcy Court) such inclusion shall be upon such fair and equitable terms and conditiоns as the Commission may impose
* * * * *
"Jurisdiction is hereby reserved for such purposes. Consummation of the merger by applicants shall indicate their full and complete assent to these requirements."
This figure was subject to reduction to the extent that Penn Central elected to assume Harlem River Bonds
Significant items included provisions for decrease for any deficiency of the New Haven's annual expenditures for maintenance of way, structures and equipment from January 1, 1964, below 30% of annual railway operating revenues, and for depreciation on depreciable property acquired with the approval of Pennsylvania and Central subsequent to December 31, 1964; and for increase in the amount of deficits in freight service net railway operating income for the years 1965-67 subject to certain limitations
The plan filed with the Commission provides that liens, charges and encumbrances on the debtor's assets shall continue upon the assets of the reorganized company, retaining their previous order and rank
We are informed that a hearing is to be held to determine whether the Supreme Court's decision of March 21, 1967, Baltimore & Ohio R.R. v. United States,
See, as to the comparable provision in Chapter X, 6 Collier, Bankruptcy ¶ 2.21 (1965 rev.)
This provides that in the event of failurе to achieve the required two thirds assent of any class, "the judge may nevertheless confirm the plan if he is satisfied and finds, after hearing, that it makes adequate provision for fair and equitable treatment for the interests or claims of those rejecting it; that such rejection is not reasonably justified in the light of the respective rights and interests of those rejecting it and all the relevant facts; and that the plan conforms to the requirements of clauses (1) to (3), inclusive, of the first paragraph of this subsection (e)."
See Friendly, The 1935 Amendment of the Railroad Reorganization Act, 36 Colum.L.Rev. 27, 39 (1936)