*1 cor- given were Apart defect, from this instructions in wholly they They as were however rect far went. form, might cases be sufficient. abstract which some were premeditation But issues of deliberation A more ade- question crucial here on the of life or death. quate agree charge, with Mr. I Frankfurter, Justice pointed would in broad up evidence, have at least outline, in relation to those issues. I
Because think in not includ- charge was deficient requested ing substantially similar, instruction one in my thus opinion failing to meet the standard set Congress in Code, and because the effect of this defi- ciency magnified by point up the failure to the instruc- given tions in some evidence, more definite relation to the I think the judgment should be reversed.
RECONSTRUCTION FINANCE CORPORATION et al. v. DENVER & RIO GRANDE WESTERN RAIL
ROAD CO. et al. 278.
NO.
Argued 6,5, March 1946 Decided June 1946. *4 D. George argued Gibson petitioners. the cause for With him on the McGrath, brief were Solicitor General Fletcher, Jr., W. Meade Lewis, Alexander M. John W. Davis, Sunderland, Edwin S. S. Homire, James L. Thomas FitzGibbon, O’G. Judson C. McLester, Jr., Henry W. Anderson, W. A. W. Stewart Arthur A. Gammell.
500 for the United appearance entered an
George L. Shearer J Drye, r. ork, J ohn W. Y Company New Trust States & Bank Central Hanover appearance for the entered an Company, petitioners. Trust Den- Nicodemus, argued the cause for Jr.
Frank C. Company, respondent. Railroad & Grande Western ver Rio Hodges. was William V. him on the brief With Bank Watts, City for the E. Jr. the cause argued Edward him With on the respondent. Trust Company, Farmers Keegan. Milton J. brief were Peter H. Holme and Thomp- H. H. filed a brief and submitted for Larimore son, Trustee, respondent. opinion Reed delivered the of the Court.
Mr. Justice five are the owners of petitioners The these cases & against debtor, Denver Rio Grande Western claims debtor, Company, against secondary Railroad The Company. & Salt Lake Western Railroad Denver just named; City are Bank respondents the two debtors Trust Trustee under the General Company, Farmers Mortgage debtor; of the and the Trustee of the principal large Pacific of com- Company, Missouri Railroad owner mon of the principal stock debtor. sought reorganization
The debtors Court District States for District of Colorado under United 1, Bankruptcy Act,1 on 1935. The § November plan Commission approved Interstate Commerce reorganization under consideration this review on June approved 1943.2 The District Court October
1 UlU. S. C. §205. Reorganization, R. G. R. printed Denver & W. Co. I. C. C. 385. See for former decisions of the Commission reorganization, 515; 583; I. in this 233 I. C. C. C. C. 254 I. C. C. 5.
25, by It then the to 1943.3 was submitted Commission the creditors of the classes deemed entitled to vote for rejection the of acceptance plan or of a certificate July 15, the result filed the District Court on 1944. All voting classes of the approved plan creditors as required by 77 except § the holders the Denver’s Gen- Mortgage eral bonds.4 On November the District rejection Court held by the the holders of plan Mortgage justified5 General not reasonably was thereafter confirmed on November 1944. (e). §77 plan provided reorganization January
The for a as of 1, 1943, by adjustment the Denver to of its liabilities its with assets or without a with consolidation the Salt Lake and the Salt Lake form system. Western to The stock latter road is held Denver. There are ruling no bonds. As no or required that we are asked to upon reorganization make turns whether the is with suggested consolidation, without give we need not further consideration In possible differences. either case, creditors with against reorganized secured claims against roads or their left property were undisturbed or consisting allocated new company, securities of new mortgage bonds, preferred first and income and com- stock, lots, mon amount face secured claims except Mortgage issue, the General that the Commis- sion and through District Court determined, adoption of the plan, equitable light were fair and respec- tive priorities, liens and collateral of various secured Bankruptcy C. H. 54,562. C. Law Service ¶
4The Denver & Company Rio Grande Western Railroad is referred Denver; herein as the debtor or the The Denver & Salt Lake Company Western Railroad Western; Salt Lake The Denver & Railway Salt Company Lake Lake; as the Salt Rio The Grande Railway Company Junction as the Junction. Co., In re Denver & R. G. W. R. Supp. 62 F. 384. given par value. were All securities claims. contingent on partly and interest fixed partly Interest charges. in annual gain play earnings used common claims and allocated eliminated unsecured cent of their claim per of ten amount face stock Its the debtor. stockholders Mortgage bonds General *7 aggregate nothing. It was determined received represented the value plan the securities through and that purposes for reorganization properties coverage for earnings adequate there was prospective charges.6 354 to 357. 2541. C.C. at supra, explanation plan, note well appear
Full as details printed to following items in the tables. tables are of certain plan. I. summary of the C. C. give the reader a convenient 382-83. from sought separate appeals review
Respondents of confirmation or both approval the order of or order to the for the Tenth Circuit. Appeals Circuit Court appeals That court reversed the Court on all District reorganization remanded proceedings Interstate Commerce Commission for further consideration with the statement, 28,40, 150 F. 2d
“Nothing in this opinion prejudice shall or fore- rights close the new parties propose reorganization power of the Commission to formulate, approve, and new certify of reor- light ganization any relevant presented facts the Commission any under 11 proceeding U. S. C. ” (d) Sec. *8 504 pro- empowered was remand, Commission this
By in all its reorganization of the to consideration ceed anew taken previously steps including those (e), phases, § Court of Circuit by opinion approved and Appeals. reached debtor the valuation approved
That court earnings. prospective present the use of mainly by neces- reflect need not adopted the valuation It held that trus- during the improvements money spent for sarily The soundness F. 2d 35. reorganization. teeship the Western fully supported of these conclusions further The Circuit Court Milwaukee cases.7 Pacific to re- refusing justified that the Commission held of June entry of its order hearings just before the open the then to hear evidence 14, 1943, approving plan, earnings of the and the 1943 existing economic conditions debtor.8 holding,
The reversal came from the Circuit Court’s
Court,
the District
contrary to the Commission and
large
operating capital
free cash
excess
needs and
earnings
from war
after the date of the
business
should be for the benefit of the General bondholders.
F. 2d 35-38. That court further held that decreases in
debt
cash payments,
consequent
with the
reduction of
required
securities that were
to be
issued under the
to cover such debt claims, should inure to the benefit of
the same General
F.
bondholders.
2d 38-39. The
Circuit
disagreed
Court
with
also
the treatment of certain
deposited
collateral
behind the First Consolidated Mort-
gage of the Rio Grande Western Railway Company and
*9
secondarily behind other issues of the debtor.
This is
Utah Fuel stock issue hereinafter discussed.
dif-
These
ferences from the conclusions of the District Court led the
7Ecker
v. Western
448,
Corp.,
477-83; Group
U. S.
R.
Pacific
Investors v.
523,
318 U. S.
Co.,
Milwaukee R.
539-41.
of
8 Cf.
Petitioners a writ of certiorari to reverse these on ac- rulings and, of the Circuit Court importance count of the of the issues in the administration of reorganization railroad under we granted their § petition October 8, on 1945. 326 699. U. S.
The of briefs all the parties questions here restate the presented in the petition for according certiorari emphasis particular party places upon points of con- troversy. general After a background consideration and respondents’ contentions to support judgment besides the applicable defenses petitioners’ shall certiorari, give we just attention to each of the stated disagreements between the appellate district and court. This will the points cover under review. problems
The basic reorganization of railroad under 77§ of the Bankruptcy Act recently have been so considered this Mil- Court the Western and Pacific waukee cases that only a summary reference to their conclusions by respondents attacked need be made now. No new enactments changed have the law since those decisions on March 1943. complexities reorganization of a railroad with responsibility pub- lic obligations security to its holders recognized. were The impossibility efficiency without destruction reversing values of process integration to restore the parts that now make up the whole system of a their original operational function was understood. The various bond issues with different and often overlapping liens, with competing claims for earnings allocation of pending presented reorganization, problems leg- hard for islative A fair, solution. administratively practical and lasting sought. method was By provisions adjustment *10 delays, to the claims, Congress intended avoid
of creditors’ em- agencies The liquidation.9 costs and sacrifices of follows: Applicable provisions 77, 11 U. C. are as of S. § § meaning “(b) reorganization this section planA within the of of modifying altering rights of cred- (11 provisions the shall include or any unsecured, either generally, them, or itors or of class of secured any otherwise; through issuance of new securities of character or the altering rights (2) may provisions modifying the of stock- or include them, through the issuance generally, any class of either holders or of otherwise; may include, any character, (3) new of securities stock- purpose preserving for such interests of creditors and the for, provided provisions for the issuance holders as are not otherwise any options receive, or warrants to to such creditor or stockholder for, reorganized company in of the such or to subscribe securities upon may such terms and conditions as be set forth amounts and (4) provide charges (including fixed fixed plan; in the shall interest debt, debt, on funded interest on unfunded amortization of discount railroads) debt, that, rent in such on funded and for leased an amount probable prospective earnings due after consideration of the experience facts, property light earnings its relevant and all other adequate coverage charges probable by of such fixed there shall be earnings thereof; . . payment available for the .
“(d) provided debtor, petition is as in subsection after a filed (a) section, reorganization of this six months shall file a within judge prop- entry approving petition the order erly filed, filing plan, Commission, . After of such a . . imprac- prima unless such shall be considered it to be facie ticable, given shall, due to all after notice stockholders and creditors determine, public hearings, in such as it hold at which manner shall opportunity given any party heard, be interested be and shall following report which the Commission shall render a and order in approve may any it plan, which shall which be different from which opinion requirements proposed, has been in its meet with will (b) (e) section, compatible will be with of subsections of this interest; public report render or it shall and order which any report approve plan. it shall In such refuse the Commission fully shall state its reasons for conclusions.
“(e) Upon plan by the certification of a Commission court, give notice parties court shall due to all in interest of the *11 under ployed Congress reorganizations to by accomplish and the Interstate Commission § were the Commerce objections parties may time the within which such file with court their may plan, parties file, be to such such within such time and shall notice, objections writing the specific fixed in to said detailed and shall, plan equitable judge after and their claims for treatment. The may debtor, notice in he to the its trustee such manner as determine stockholders, Commission, trustees, creditors, or and the hear all parties opposition objections support of, to, interest and in such plan to such equitable the and claims for treatment. After such hearing objections filed, judge hearing, any and if no the without are (1) approve plan complies if that: with the shall the satisfied It (b) provisions section, equitable, this is fair and affords of subsection of recognition rights stockholders, due the of to of each class creditors and unfairly any does not discriminate favor of class of creditors or stockholders, requirements will conform the law of the and to the of regarding participation the of land the of various classes creditors stockholders; . and . . judge approve plan,
. opinion, . If the shall he shall an the file stating therefor, his conclusions and an the reasons and enter order copy effect, opinion to that shall send and a certified of such and order by to the then Commission. The shall be submitted the Com- mission to the creditors of each whose been class claims have filed requirements (c) and allowed in accordance with the of subsection section, class, this and to the of each stockholders and/or representatives thereof, rejec- acceptance committees or for other or tion, together time specify, within such as the shall Commission with report reports the or thereon Commission or such summariza- approve, tion may opinion thereof as the Commission and the and judge: Provided, any order of the That submission to class of stock- necessary holders found, shall not be if the Commission shall have and judge finding, (a) the shall have affirmed the that at the time of the finding corporation insolvent, finding that at or the time of the equity value, of such class of has no stockholders or that the provides payment for the in cash to such class of stockholders an amount equity, any, not less than the value if . of their . . Provided further, any That submission class creditors not be neces- shall sary if found, judge Commission shall have and the shall have finding, affirmed the that interests of such class creditors will adversely not materially be and plan, affected that at the or finding time of the the interests of such class of have no creditors Congress was reached The answer courts. must be relied of the Commission judgment experience matters of value and of determinations upon final review subject judicial interest, affecting public statutory with assure constitutional compliance mem- all interpretation requirements. This payment in cash to such value, plan provides for the interests. than the value of their of creditors an amount not less class judge certify the results of such . . . The shall Commission submission. judge certification, “Upon receipt shall confirm the of such *12 by accepted been or on plan if it has behalf of creditors satisfied that required is under this subsection of each class to which submission holding in the more two-thirds amount of total of the allowed than reported of such which been in said submission claims class have by voting plan, of of each as on said and or on behalf stockholders required holding this class to which under submission subsection reported than the stock such class which has been more two-thirds of of voting acceptances plan; in on and said submission as said that such procured by any means law: have not been made or forbidden Provided, plan accepted by That, if the has not been so the creditors stockholders, judge may plan if nevertheless confirm the he and the finds, hearing, adequate provision and after that it makes is satisfied equitable and the of for fair treatment for interests or claims those rejection rejecting it; reasonably light justified in the that such is not respective rights rejecting and those and all of the interests of it the facts; requirements the to relevant and conforms the of (1) inclusive, (3), paragraph to of clauses the first of this subsection (e): ... necessary any property
“If it shall be to determine the value of any section, purpose under this the Commission shall determine such certify plan. to in report value and the same the court its on any property operation The value of used railroad shall be deter- give earning mined which will on basis due consideration to the past, power property, present, prospective, and and all other determining only facts. In relevant such value such effect shall be present given reproduction depreciation of cost new and less original property, the actual therein, cost of investment may required land, under the light earning as be law of the of its power and all relevant other facts.” and the language from the act bers of this Court congressional hearings, reports purpose evidence Congress courts, confided and discussion.10 To to determine whether Com- power review the statutory has mandates of subsection mission followed had (e), U. at and whether the Commission S. S. support its conclusions. 318 U. material evidence to concurring at at 477; opinion 512. in the reached point,
At this we restate our conclusion congressional authority former cases that to the Com from participation mission to eliminate claims valueless reorganization valid exercise the federal bank is a power. ruptcy Section was directed at relief debtor railroads. Liquidation 1467. § Stat. depression periods large portions meant that debts, well as stock interests in the would be properties, irretriev ably holders, capi lost their while on reorganization talization that estimated what normal would sup income port meant the salvage sound values. We see no more impediment constitutional elimination claims against railroad debtors the Interstate Commerce Com mission’s values, judicial determination of with review as sufficiency of the evidence and compliance with *13 statutory standards, than we do to their elimination 11 accepted an bid in a depression market. There is no occasion here to reexamine further these recent hold ings of this Court in the Western and Milwaukee Pacific reorganizations.
In examining the contentions of petitioners as to the alleged errors of the Circuit Court of Appeals, we must 10 472, 318 U. S. 473, 477; at concurring opinion 512; at 318 U. S. at 545. 475-76;
11 318U. S. at
318 ü. S. at 536-39.
Compare Wright v. Union
Co.,
Central Ins.
311
279;
S. 273,
U.
John Hancock
Bartels,
Ins. Co. v.
308
180, 186;
U. S.
v. Na
Gelfert
City
tional
Bank,
approach problems embodies method 77. That section authority under § in 193513 in 193312 Congress improved and that selected country system of transportation the railroad put its duties to perform and to meet its debts order Our recent years depression. hard after the public were of the section provisions the chief constructions of 1943. the results March, Although down handed construed, have section, as thus reorganizations under changes sug- have been criticized as unfortunate been been enacted.14 Indeed legislation has gested, no different 1474. Stat. 1; Cong., Sess., p. Rep. 1283, 74th 1st 911. H. No. 49 Stat. 1; Fuller, 1336, Cong., Sess., p. & Amend Rep. No. 74th 1st Craven S. Bankruptcy Law, 49 Harv. L. Rev. 1254. See of Railroad ments seq. Corp., 470, R. 318 U. S. at et Ecker v. Western Pacific Hearings 4779, Sess.; H. R. 79th 5924, Cong., R. 79th 2d on 14 H. 13; Rep. 1838, Cong., H. 79th 2d Cong., Sess., 1st No. Serial No. Sess., p. 3: by Congress “Although intended all these laws were theory ownership, the has preservation of our railroads and their appeared to prevail capitalization companies that the in section drastically proceedings be reduced. That should all cases consistently persistently. what has been done Under 77, interpreted past administration of that section statute applied by the and by already Interstate Commerce Commission and affirmed Supreme Court, thousands small countless stockholders wiped investments, out, would have been and their which great value, uselessly destroyed. many be of There now were are upon more such in- thousands thousands of stockholders whose imminently fate, vestments are with a like unless threatened Congress promptly legislation prevent enacts such needless $2,000,000,000 And aggregating
loss. be over —would loss— largely by widely (many suffered scattered class of citizens employees their very railroads) thousands of whom are of these who legacies savings greatest invested their private enterprises, in one or of America’s children, purchase for education their homes, security age. literally may in old It be said these stocks were the orphans favorite investments of widows and and of trustees.” S. Cong., Sess.; Rep. Cong., Res. 79th 1st S. No. 79th *14 Sess.; 1253, Sess.; 2d S. 79th 2d Cong., Hearings 1253, on S. 79th in enacted 1939 and reorganization, different method for designed meet of railroads not need requirements to reorganization provided by of the character of financial adjustments opportunity voluntary 77 but of an only § July 31, 1940, and a creditors, their terminated on with lapse 1942 was allowed to comparable provision made clear the 1, 1945.15 This situation leaves on November agencies with duty of the of the Government entrusted reorganizations 77, including this handling § under Cong., Voluntary Struc- Sess., 1st Modification of Railroad Financial tures; 1253, Cong., Sess., Hearings on S. 79th 2d Modification of Rep. 2; Cong., Structures, 1170, Part S. No. 79th Railroad Financial Sess., pp. 2d 1-2: adjust (S. 1253) companies their “The bill enables railroad quickly, economically,
financial affairs and on a business basis. any procedure provides it will reduce of their disturbance minimum, provide protection affairs for both the will to a and railroads and the maximum of their investors. existing law, 77, 1933, “The section was enacted without hear- ings by any and without consideration subcommittee or committee of railroads to It help the Senate. was enacted the belief that it would correct their It financial affairs. was found to do the opposite. placed It has in the handá of officials Government extraordinary power, they requested, which not had over 25 percent country’s mileage power they railroad which —a have exercised: (1) every part to demolish corporate of the financial and railroads; structures of those (2) every respect corporate the financial and fu- railroads; ture those (3) pick railroads; men to control those (4) to decree the forfeiture of billion of investments. $2% present puts “The bill every end an one of powers those operation restores the managements of railroads to their and the adjustment of companies their finances to themselves, with the assistance of their securityholders, necessary.” where A Analysis See Critical Reorganization of Recent Decisions of the Supreme Court of States, the United F. Nicodemus, Jr., Hearings C. on H. 4779,subsequently R. 5924,79th Cong., H. R. Sess.,p. 1st 181. 1134; 53 Stat. 56 Stat. A 787. bill to extend this act to passed by H. R. Representatives the House of on November I, 1945,91 Cong. 10276; Rec. Rep. 1128,79th H. No. Cong., 1st Sess. *15 best their according provisions its
Court, to administer expressed Congress purposes understanding contemporaneous the light 77 read the the words of § conditions in economic Changes Congress. discussion agencies reorganization the powers the affect cannot changes require reexamination may such though even those exercise of the former present the fairness of into powers. Western, the & Rio Grande The Denver
Valuation. link in transcontinental important debtor, is an principal availability the debtor of The transportation.16 recent value, rate-making properties, Full the the elements details of capital beginning at corporate history, the structure earnings throughout appear reorganization and proceedings, traffic original report Commission, particularly the reports the various suc properties of its are in 233 I. C. The location and extent C. 515. cinctly page 518, the Commission at as follows: described Pueblo, principal “The termini are Denver and Denver’s eastern Colo., son, Topeka points Atchi- at which with the each of connection made Railway Santa Fe and the Colorado & Southern & Railway. Chicago, Denver made with the At connection is also Quincy Burlington Railroad, Chicago, Pacific & Rock Island & Railroad; Pueblo, Railway, at also with Union Pacific Railroad, the Missouri Pacific which is the Denver’s main outlet to the east. passes through “On the main Denver the west line of the Salt City Ogden, Lake and terminates is made at Utah. Connection with the point; City Union Pacific at each at Salt the Den- Lake Ogden ver also connects with the with the Southern Pacific. The Pacific Western Railroad and at interchange with the Western important Pacific any is more with than that other western connection. 1,256.6 “The road owned the Denver consists of miles of 1,094.9 main line and miles Operated of branch lines. under lease are the to Grand Railway Rio Grande extending Junction . . . from Rifle Junction, Colo., miles, Railroad, Valley 62.1 the Goshen a branch 8.8 in length, line miles Western, and the Salt ex- Lake tending Dotsero, from on Denver, to Orestod on the Denver Railway & Salt . Lake . . 38.1 Including miles. these leased
lines, operates approximately Denver 1,357miles of main lines 1,104 miles of branch Approximately lines. 771 miles of narrow-gage are operated lines mileage. included “In addition to the mileages, above-mentioned oper- the Denver ates Lake, over the Salt between Orestod, Denver and 128.6miles. im- (1934) Cut-off the Moffat Tunnel and Dotsero strategic competition for “over- proves position its consigned that is “bridge traffic,” is, head” or traffic its lines. traffic beyond from and destined to points is mixed in originating terminating on its lines charac- *16 ter general prosperity region. and varies with of the the organ- present Denver, debtor, the principal was in ized 1920. It the & succeeded Denver Rio Grande in Company acquired Railroad of 1908 which had its turn the of Com- property Railway the Rio Grande Western owning pany, portion present debtor’s western of lines, and & Rio Company Denver Grande Railroad owning of 1886, portion present debtor’s eastern lines. A portions, connection between the two Rio Railway, Grande Junction is under lease to the debtor which, stockholder, guarantees as lessee and a the Junction bonds. Substantially capital all stocks of the Salt Lake Western, and Salt Lake and various other branch arrange- lines are owned by corporate the debtor.17 These operations ments for the have debtor resulted the assumption or creation the debtor of the claims issues, supra. various listed note 6,
Just reorganization began, after these De- proceedings cember 31, 1935, report long- the debtor’s showed that its term debt was $120,541,000, and its current liabilities $24,990,901.63. assets, It current including had cash $1,257,943.43, $5,966,666.93. At the time the together line, Western, This the Salt with Lake constitutes the ownership Dotsero cut-oif route. The Salt Lake’s embraces the extending Junction, Denver, line from Utah near western at Craig, Colo., terminus the 220.2 terminal, miles. For its Denver uses, lease, Lake Salt under a the facilities of the Northwestern Company. Terminal Railroad The Salt Lake derives no revenues through moving from the cut-off, traffic over the all such since traffic is handled the Denver.” 17See Denver & Salt Lake Western R. Construction, Co. 154 I. C. C. 51; 535; 175 I. C. C. 233 I. C. at C. 520. 1942, of December report, as effective, the became lia- and current $130,264,826.65 debt of long-term showed liabili- in addition deferred $14,172,575.50, bilities of $45,582,132.66. interest default matured chiefly ties, $10,850,149.96, including cash assets, current There were items 31, 1944, these December As of $20,983,652.54. liabilities current $129,358,337.79, debt Long-term were: $55,310,151.80. liabilities deferred $20,539,637.83, $19,- including $32,665,501.33, were The current assets in cash. 142,626.96 system income of
During period examined at by the Commission was found for interest available this was adjustment After 1936-1938. its lowest In there was I. C. at 552. C. $2,893,255. present When the at 10. $5,019,436. 254 I. C. C. June, the Commission approved by con- recognized but the interest was income available *17 nega- be thought was earning power tinuance of such I. C. C. at 356. forecast.18 254 by any sound tived improve trusteeship were used Earnings during the taken the vote was the debtor railroad. When charges equipment and account showed the real estate An ten during trusteeship. estimated $43,291,513 approval Commission’s million of was between the it certification plan, June, 1943, Commission’s by claimants. July 15, 1944, on to the court of the vote explanation 254 I. 354 and 382 for of new See C. C. at re- equipment program to meet the war situation. The tirements respondent are said trustee to have been $13,000,000, leaving capital about a net addition to ac- $30,000,000. Respondents urge count of capi- since reports The show the income available for interest as follows: ........................$17,044,420.39 11,573,667.94
1943........................
8,157,880.25
1944........................
by the Commis-
substantially increased
not
talization was
draft
came
when the first
sion between
junior
1943, creditors
staff,
from the Commission’s
improve-
for this investment.
got
nothing
little or
That question
have
or unwise.
may
ments
been wise
must
Railroads,
reorganizations,
not before
even
us.
or to lower
public
make additions to take care of
needs
operating costs.
389. The senior bond
Supp.
See
F.
period.
continued
As
during
interest
to accumulate
this
capitalization
pari passu
with
was not increased
purchases,
junior
holders of
securities received less
participation.
The Commission did not
that the
consider
earning
justified greater
prospect
capitalization
than the
given
one
and we
judgment
think its
controls the valua-
tion.
As
said
Appeals
Circuit Court of
In re
Co.,
Denver & G.R. W. R.
The last sentence, think, we overlooking has the vice of the reason the gave Commission common stock to the *18 Seniors. See discussion under Allocation Securities. of
We note also the contention that the possibility aof national income higher much and interest rates much lower than before World IIWar should affect valuation on prospective based earnings. Those factors, think, we were before the Commission when it made its earnings estimate. of a sound reached its determination
The Commission these with properties for the combined capital structure it. In addi- before figures earnings and investments on complete had statistical course, tion, the Commission it from its of Valuation guide Bureau information traffic, earnings, inter- dealing rates, with its sections other will est, The discussion the Commission et cetera. Pro- in note 2. in its listed printed be found volumes in the Western ceeding upon principle accepted Pacific cases,19 capitalization upon based and Milwaukee that reorgan- earnings permissible is a method valuation as the sound ization, $155,173,127 the Commission fixed capitalization. capitalization This under the terms of sinking capital with for fund and the issues, provisions a varying with the funds, charges annual at rates carries This $6,211,250 before dividends on common. security charge, assume, let us cent present plus, per annual five or total of annually upon common, $1,758,379, figure $7,969,629, adjust- basic to be with applied, factors, to earnings, past pro- ments for variable dividends, spective, available for interest and as an aid present the fairness valuation. See determine note The decision was Com- except 6. unanimous one high by missioner who considered the valuation too ten per cent. 254 I. C. C. at 379. There can be no doubt June, 1943, ample justify as of there was evidence to valuation made Commission.
Allocation
Securities. Within
framework
valuation,
Commission allotted the available securi-
Securities, including
ties
the claimants.
the common
given
face
stock,
aggregate
were
was too
value. The
anything
small to allow
former
stockholders.20 Thus
they
reorganization.21
were eliminated from the
For the
483;
318 S. at 482
U.
517 bonds, stock was available of the General common holders A of their claim.22 only ten cent per the amount of 6 will show note proposed at the distribution glance all the new senior secu- did not receive that the claimants priorities. their rities in the strict order of old of a railroad when val- part of a lien on value solely be fixed on earnings is made from cannot uation new Nor is it to issue securities mileage practicable basis. a lien limited to the that was covered property with system lien. segregation old There must be lien earnings existing each and allocation securities system representing value each class claimants. This here in the 6.23 was done as shown second table note principle Such a method is in full accord with the senior creditors are to posi- retain their relative priority Group tion a reorganization. Investors v. Milwau- Co., kee R. 318 S. at 561-64. Furthermore, junior U. claims can receive nothing until the senior claims receive securities a worth or equal value to their indebtedness. 318 483; U. S. at 318 U. at 569. The S. Generals are defi- nitely junior. 2331. C. C. at 524.
The Commission did not make a finding that the cash value of the securities awarded the senior claimants as of the effective date of plan equalled the face of the claims. It did, however, carefully state its reasons for concluding that the compensation “flowing under the plan to the various classes of bondholders for rights sur- rendered them” adequate in the light of the full priority rule. 254 I. C. C. at 360. For classes, those other than the Junior Generals, that received common stock, the Commission said that the possibility of “unlim- ited dividends on common stock” awas factor in offsetting
222541. C. C. at 359. 23See for discussion of the formulae 233 C. seq.; et I. C. at I. C. C. at and 359-76. *20 Commis- when that clear it is Thus position.24
loss mind that in definitely had it allocations its made sion compensation creditors the senior gave thing one in secu- to participation claimants junior admission was payment cash full obtained the seniors rities before might dividends in unlimited to share chance their part have stock to the common paid on be earned ap- income noted that be It should years.” in the “lush prior in 1942 highest its was at to dividends plicable 1943. June, the Commission by the plan approval in the Com- 1942 were earnings of the abnormal Therefore opportuni- of the spoke when it contemplation mission’s of the Its discussion dividends.” ties for “unlimited be as earnings might large. that 1943 available assumed 2541. C. C. at 355. through road condition of the improved physical main- previously deferred
expenditures of the trustees for equipment was before tenance, improvements and new necessarily entered into their valua- Commission tion of the 233 I. 531. property. C. C.
There another stock important factor, corollary ownership, to be noted in the Commission’s allocation of these securities. This factor is that the creditors who received common stock to make them whole obtained with
24Rio consolidated, Grande Western 254 I. C. C. at 365: “Loss in earnings position rights, and surrender of opinion, other in our are by possibility permitted by offset of increased return the 4%- percent 5-percent bonds, income preferred stock, convertible unlim stock, ited dividends on common and the plan.” other features of the id. at 364: “This Denver & consolidated, Rio Grande apparent change earnings position sinking is offset the new capi- fund and tal fund and the increased rate of return obtainable from the new securities, e., slightly i. percent excess of 4.5 percent for 64 of the claim and unlimited stock dividends for the remainder.” R,io Denver & id. at Grande refunding Western and improvement, “They 366: also will receive whatever may paid dividends be on 97,706 shares of common stock.” all in all cash on hand or an interest stock that common course, Commis- Of might be accumulated. cash that fact, In it referred this. thoroughly sion understood 1943. plus January 1, on hand as of the ten million cash following this reference Immediately I. C. 353. 254 C. year needs of the road for the is a full discussion of cash 1943, including additions, equip- betterments and new ment, it and the amount which was estimated would be at the That treasury year. end $15,600,000. This would be reflected the value cash The petitioner common stock. states that *21 in highest Exchange price when-issued Stock 1945 for the $31%, $100. common stock was par See Commercial and p. Financial Chronicle, May 13, 1946, 2618, where the is quoted Bid, common at 29 Asked. Cash, material supplies, and as well as all other assets and all liabilities debtor, represented of the by were the If securities. there is more cash on hand than taxes, expenses needed for and proper improvements, it is at the disposal of the common If stockholders. money was used to pay indebtedness, there would be a in corresponding reduction capital the structure. Therefore, the provided, I. C. atC. 386:
“The new company shall be deemed to have come possession into properties the as of the effective plan. date the
.“. . The capitalization of the new company, as of January 1, 1943, after consummation the plan . . . shall consist substantially following of the securities, excluding those be pledged, the amounts subject stated being to reduction to extent, if any, that matured interest proposed to be funded plan is paid, and equipment obligations or other paid liabilities are . reduced . .
It is accepted by the senior claimants that is fair equitable and as between themselves. If we are correct in our conclusion that the method and result of valuation of their claim cent per of ten sound, the allocation matter of as a follows the Generals
common stock computation. stockholder, of a objection
It follow that would also its through Company, Railroad Pacific Missouri future voting trust for reorganization, Trustee this because be ineffective debtor would of the control reorganization is eliminated from stockholder of securities. allocation and property valuation voting trust creating reasons For the Commission’s 33, 35, at 367. I. C. at 254 I. C. C. see 233 C. Appeals Court of Earnings. The Circuit and War Cash “very little earnings were of view that war was of the earnings this future probable in estimating the value is to come” economy which peace property right apprais- its was well within that Commission was after F. at 34. This ing lightly. them 2d year 1942. earnings top million seventeen assets excess current agreed, too, court appellate made capitalized improvements be should not con- reorganization had been during trusteeship for in fixing and District Court sidered the Commission *22 earnings. by past prospective and their valuation following F. The then made the appellate 2d at 35. court ruling: They in full. paid
“The Senior Bondholders were and of the com- received all the new securities most Bond- Ninety per stock. cent of General mon only They received wiped holders’ claims were out. stock, of their per a common ten cent small amount of claim. funds are essential Adequate operating total Senior Bond- operation to the railroad. The in were addition to holders entitled to receive claims, working capital full amount of their sufficient operation and efficient of the railroad. proper for reasonably in neces- anything But excess of what was insol- sary for this constituted assets purpose corporation belonged remaining vent which to the creditors.
“We think it is apparent from the record that there were consisting current on hand assets cash and securities excess of what was needed for the efficient operation working As pointed out, road. capital of the debtor had increased from a deficit $9,727,230 as December surplus $12,125,863.50 31,1944. as of December While these earnings large increased net part are due war and will not war, continue after the end of the may disregarded setting up therefore be capitalized upon prospective structure earnings, based disregard we cannot huge the fact that these sur- pluses actually exist. Their existence is an accom- plished It fact. is also will surpluses obvious pile yet continue to up a reasonable time come. We think which any fails to take this into gives account and which the Senior Bondholders their claims full substantially delivering the road to them, and gives surplus actually them the cash on hand and further enables them to receive addition profits the excess war which are reasonably sure to come, is inherently inequitable unfair, long so there are classes of creditors whose claims are not fully satisfied.” judgment
In our holding this is erroneous. The effective date of the was fixed the Com- mission as January 1,1943. was in power.25 This its allocation of the securities took into in- consideration the terest of the secured gain claims to that Any any date. loss after that time was a benefit anor injury to the new common stockholders and then security sometimes to holders in positions senior to them. Assuming that courts, as courts with equity powers in a bankruptcy mat-
25 Ecker v. Western
Corp.,
R.
318 U.
at S.
509.
Pacific
Interest accrues on the secured claims until the effective date of the
*23
plan. Group
Investors v.
Co.,
Milwaukee R.
318 U. S. at
of
546.
Compare Ticonic Bank v. Sprague,
ter, might set subsequent of account merely on Commission, the by na- the region the or of conditions economic changes of changes are when not done be tion,26 it should Com- by the considered envisaged and that were kind explanations upon deliberations its mission plan. deal- opinion of this in the section pointed have out
We part that the securities ing with allocations position loss of for their claimants to senior compensation earnings. This war participate opportunity was the Commis- District Court27 was understood fund operating beyond of cash sion.28 Accumulations dealing prob- In with the category. needs are the same a five cent dividend per noted that lem, the Commission require avail- would an income on the authorized common The Trus- $7,969,629. able and dividends of for interest earnings between tee claims no such for General bonds Even before the difficul- transportation 1929 and 1942. judg- 1946, ties it was obvious Commission’s being 18, ment was confirmed events. See note supra29
Improvement Program inures to stock. the benefit of the common anything expendi- If the latter is worth it much is as due these any as to This, tures assets and wartime permanent, other factor. with the increase in current earnings which counsel seem believe are only equity preferred constitute the behind common stock.” C. 2541. C. at 356. foresight Mankind's is limited. The uncertainties of future esti recognized. mates are It is not without note, however, interest April on the railroads petitioned United States the Interstate freight Commerce Commission for increased rates and charges. This said: “The situation of the railroads has now become critical and
their need substantially higher for a level freight rates has be- *24 holdings in its set out of the Court error Circuit The the senior bondholders assumption lies in its above to them with- in full the securities allotted were paid of the Commission also the determination accepting out 1, 1943, of and all January represented that the assets extraordinary of an com- imperative. is the result come This postwar which the railroads bination of war and conditions with confronted, particularly are and more the result of three factors (1) wages development: of increase in of railroad recent per procedures employes of 16 hour determined under the cents Railway 1, April, January Labor Act in retroactive to 1946; (2) large present increases, prospective, in both and prices railway (3) supplies; sharp of materials and and decline railway greater railway in volume of traffic and an even decline revenue. freight passenger “The of falling volume and traffic is continu- ously, anticipated and it is that the will downward rate accelerate in the months to come. The revenues will be reduced reason both of the decline in nearly volume and a return to a more nor- composition mal It is operating traffic. estimated that revenues Class I present railroads on the basis rates, fares charges, and approximately would be $6,800,000,000, per or 23.5 they cent less than were in 1945. “Freight passenger peaks traffic reached their in 1944. But railway net operating began income and net income to diminish in increasing rising operation. 1943 on account of costs of In the face through 1944, traffic railway both net operating income net steadily income moved reaching downward after their peak in 1942. With the cessation of began hostilities 1945there gross to be a decline also in expected revenues which is to be- pronounced come more as the abnormal war conditions dis- appear, highway disabilities of agencies carriers and other transportation removed, are prewar pattern and the railway traffic is resumed.” The Denver apparently vary did not greatly from this pic- overall ture. Its net revenue for railway 1945 from operations dropped from $20,569,809 $14,246,504. gross operating Its revenue, however, increased four and a half million. The largely loss net was due increased amortization of projects. defense monthly report of expenses revenues and by the Denver for January and February of 1946shows a decrease of operating revenues $10,856,764 from $8,932,983. stock common part also earnings were
subsequent
bondholders.
the senior
was awarded
for secu-
provides
The Debt.
in Senior
Decreases
*25
first
Junction’s
the Rio Grande
of
place
take the
to
rities
assumption
for
$2,758,333 and
face amount of
5’s in the
obliga-
equipment
$5,758,000
of
reorganized road
by the
the Generals.
securities are senior
All
these
tions.
of
$1,218,000
paid
the Junctions
purchased
The Denver
necessary capital-
This reduced
Equipments.
on the
The
Court
Circuit
by
aggregate
sum.
ization
these
“The value behind
opinion that
Appeals was of the
Bondholders,
belonged to the Senior
in no wise
securities
This
We called capitalization reduce the granted the District Court January 1, on company of the new as interest due obligations paid. or or other liabilities were equipment its authority District Court and in acted on this be approval plan Junctions, “They may said may cancelled they plan acqui- or be utilized under sition of new will securities which become an of the asset reorganized H., C. company.” Bankruptcy C. Law Serv- 1942-1945, ice Decisions 54,562 p. 55,635. at The Junc- ¶ tion bondholders did not vote on the Under our plan. determination that the creditors who common received compensated partly stock were by assets and future earnings, it is obvious that the use of such assets to retire is a part senior claims of the normal and incre- expected holdings ment from of common stock. The increase common stock Commission to the Generals from ten per claims, five to cent of the bondholders’ preliminary adoption plan, of the 254 I. 352, 359, C. C. at is partly necessary attributable a reduction of capitaliza- in junior tion. This increase participation differs from proposed. now The former reduction of senior cap- italization could earnings be carried out because prior the adoption of the it plan unnecessary made to borrow money reorganization. When proposed capitalization being planned on earnings, a reduction of capital senior earnings without reduction of estimated increases possible junior capital within the scheme. When reduction capital place senior takes adoption after the use of anticipated earnings cash, existing there readjustment can be no junior such participation be- cause assets the balance sheet adoption at the subsequent earnings as we are, pointed have out, for the benefit of the stockholders company the new through *26 so that these common advantages stock these new may stockholders be compensated their loss pay- in ment full in Of course, cash. this section of the opinion is written and must be read on the assumption that allocations of common stock are fair and equitable, a supra. matter discussed
Utah Fuel Company Stock. The Rio Grande Western Railroad inCo. 1899 executed its First Consolidated Mort- gage, an indenture to secure its of First issue Consolidated Bonds, maturing April 1, 1949. Rio Grande Western right reserved the to issue additional bonds under the indenture.
The Utah Fuel Company in organized 1900, with was capitalization 100,000 In agreement shares. 1901 an was entered into Western, Rio Grande the trustee under the First Consolidated Mortgage, and the owner of the Fuel Utah stock. The provided contract the stock would be held by the trustee to secure bonds issued under the First Consolidated Mortgage and that Rio Grande Western would have the right any at time on paying the $6,000,000 trustee in cash or an delivering equal face in amount First Consolidated bonds to receive the Utah lien, Subject to the lien. mortgage stock, free Fuel Western. Grande to Rio transferred was the stock issued were First Consolidateds in additional $6,000,000 the stock. the owner of Company Railroad & Rio Grande InT908, the Denver Rio Grande property acquired organized and was its First Consolidated obligation of assuming the Western, redemption of equity of The bonds of 1899. Mortgage Fuel the Utah Company Railroad Grande Denver & Rio and transferred in 1918 under execution sold stock was Corporation. Railroad Western Pacific Rio among the Denver & agreement In under an Pacific the Western Company, Railroad Western Grande Com- Pacific Railroad Missouri Corporation, Railroad agreement became Alexander, who and T. S. pany, stock, Utah Fuel redemption equity of trustee of the Alexander, Trustee, T. S. Pacific transferred Western Mortgage, pledge under the Consolidated subject to to said and the debtor transferred its Fuel stock Utah through stock, it had in the whatever interest trustee releases, important. not here certain bene- provided that the ultimate agreement first was vested the Utah Fuel stock so held ficial interest Western Missouri Pacific and one-half one-half impor- not here Except contingencies for certain Pacific. under the 1924 it the trustee tant, provided *27 by him from all dividends received agreement pay would Mortgage on Utah the trustee under the Consolidated long any the debtor so as of the General Fuel stock to outstanding. were Refunding or bonds that, if General agreement provided The further the Refunding mortgage of the or the or other Mortgage the interest foreclosed, debtor were the trustee would sell in subject Utah Fuel stock to the mortgages of these the Mortgage, outstanding, if apply Consolidated and to the of the bonds secured proceeds payment in stock, dividing equity redemption any surplus Pacific. between Western Pacific and Missouri Mortgage Refunding The General and bonds created reorganization given were thus a lien on the junior Fuel the lien & Rio stock, Utah to Denver Mortgage. Grande First Consolidated Under approved by the Commission and the Court, District the First Consolidated bonds allotted were bonds, their claim in new income preferred 20% 73% stock, pro- and common stock. The further 7% vided, 398-99, 2541. C. atC. that:
“The trustee under the Rio Grande Western Rail- way Company mortgage per- consolidated shall be mitted obtain the in the equities release stock of Utah Company Fuel and distribute the among stock the holders of the aforesaid bonds agreeable them, any rights manner its to enforce pledgee as of the stock of the Company, Utah Fuel proceeds recovered to be distributed to the holders of the bonds.”
The took position Commission that this the other features of the treatment of the First Consolidated bonds justified were compensation earnings for posi- “loss rights” tion and surrender of other the plan. under The Commission made definite with finding respect no to the value Company Fuel The stock. Commis- had through sion before it respect evidence 1936 with the value of the stock as well as appraisal an of the value of the Fuel Company made for the trustee of the First Consolidated Mortgage, which indicated a value $4,653,720. only paid dividend debtor Utah Fuel under agreement the 1924 in 1934 amounted $250,000; the debtor in applying its formula earnings allocation of by mortgage districts credited the Consolidated Mortgage with an income of $83,333 per note 24. See *28 over allocated payment that dividend on based
annum the The status 1934. 1932 to period, three-year the original in its the Commission by considered was stock pro- and reports, its supplemental its several report unchanged. remained stock respect to the with posals 1943 on ob- the District Court before proceedings In Fuel Com- that the revealed it was plan, the jections to first and for the $415,000 was income for 1942 net pany’s no has company $535,869.31 months seven debt. funded respondents contended
In the Circuit Court be com- bonds should First Consolidated holders pro- collateral, applying pelled to foreclose this either claim with the value claim, or credit their ceeds to their only be new securities for of the collateral and allowed disapproved treatment The Circuit Court balance. with respect bondholders the General stock, to the fact that the Com- Company pointing Fuel permitted re- mission had “doubts uncertainties” to respect collateral, main with to the value of the and that if danger that, there was a the collateral had substantial value, the First Consolidated might bondholders receive more than full payment.
The facts set fully support out above the conclusion of the Commission that the “title to the stock is vested Pacific Missouri and Western Pacific.” Whatever rights may the debtor have retained after sale on stock execution 1918 were released to the trustee and the two railroads in 1924. We have then a situation in which the holders of the ultimate beneficial interest in stock which had been pledged previously under mort- gage permitted have interest to be encumbered a third person, debtor, namely security for its
31According Moody’s
(1945)
Manual
the net income of the Fuel
Company
$865,140,
$653,901,
surplus
and earned
at the end
year $4,862,980.
of the latter
*29
Refunding
General and
bonds. The rule
settled in
is
bankruptcy proceedings
by the
that a creditor secured
property of others need
deduct the
of that col-
not
value
proceeds
Bldg.
lateral or its
proving his debt.
Ivanhoe
Orr,
& Loan Assn. v.
Respondents, speaking only for the General bondhold- ers, object that the plan gives the First Consolidated bond- holders all the proceeds Utah Fuel stock or its addition to securities the face value of which to one amounts hun- dred per cent of their The Refunding claims. bondholders objection. no It make is thus contended that deprives junior the General bondholders of their interest in the stock without a determination the value of that stock, finding aor of the extent to which the Consolidated have paid by bondholders been the new securities to be given them. We do so read plan. not The provides merely that the trustee the Consolidated Mortgage “shall permitted be to obtain the release of equities stock of the Utah Fuel Company” and proceeds distribute the stock or its holders bonds. This statement requirements contains at least two met to be before the Consolidated bonds anything obtain from the collateral. The first is that the trustee of the First Mortgage Consolidated be existence. Even after goes the plan into operation and the old securities are cancellation, surrendered for there is no requirement the trusts terminate they since will continue prop- to hold erty other than that of the debtor. Section (f), which deals with the effect of a confirmation discharge and the of the debtor from liability, does require. not so Hence whatever action the trustee may Consolidated takes be commenced prior to or after consummation of the under trustee respondent, permit will This
plan. in existence continue would which Mortgage, General safeguard its steps necessary to take purpose, the Generals.32 on behalf in the collateral rights plan, in the explicit is which requirement, The second in the equities release obtain the the trustee under right an absolute lienors have junior stock. agreement the 1924 pledge the terms *30 right $6,000,000 over of the stock proceeds the all make the needed to proceeds not of the any part also the Con- whole. trustee bonds First Consolidated here that enforcement in its brief concedes solidated judicial only through brought about pledge can be the pro- in such correctly out that points It proceedings. who have given can to all those ceedings full be protection fear that Respondents’ in the any junior interest stock. the trustees mortgage the General bondholders and unable junior will in existence and so interests not be protect to be themselves has been above demonstrated without foundation in fact.
The result any is that of the did not this feature way change rights or affect existing the collateral. The respondents judicial show may proceedings which must be brought by trustee of the First Consolidated Mortgage that the First Consolidated bonds have been fully paid by the awarded them securities under the plan, if such be fact, or the respondent, trustee of the Gen- eral, may itself bring proceeding against the trustee of the First Consolidated mortgage for a determination of rights of the Generals. Petitioners concede, as they must, that they are not entitled to more payment than full and that they are under a duty to account to the respond- 32Obviously, the Fuel stock proceeds or its could be distributed to record holders of the old securities the date or dates of dis tribution of the new securities. made have been surplus remaining they after any
ents for whole.33 stock
The treatment of the Utah Fuel disposition with certain consistent the Commission’s with the Reconstruction Finance Cor- pledged collateral Corporation parties and the Railroad poration Credit than the debtor to secure notes of debtor other R. Co. Reor- the Western case. Western Pacific Pacific I. C. 432. The Commission ganization, 233 C. this the collateral and permitted pledgees to retain collateral, other approved action, saying, Court “This refunding than the therefore left with bonds, was with its pledgees position by any unaffected direct action Corp., Ecker R. Commission.” v. Western Pacific supra, at 506. Rejection.
Reasonableness As the conclusions Appeals upon Circuit Court of securities, allocation of the treatment cash, earnings, Commission of war in debt priority decrease with over the dif- Generals *31 fered from those Court, made this that court’s conclu- sion that the General reasonably bondholders were justified in rejecting the plan naturally. followed 150 F. 2d 40. (e) gives Section power a class, to here the General bondholders, reject plan subject to the to the power of the District Court, after certification of the result of the submission, to “confirm plan the if he is satisfied and finds, after hearing, that it makes adequate provision
33There illogic is a certain position the of First Consolidated asserting any rights bonds in in the If, they collateral all. at con cede and hold, they we now paid are entitled to be in full in secu new rities regard collateral, without to may the they it be that have been fully paid by the new given they securities them complain since do not of their treatment plan. under the they only Since are entitled to full payment it would then they seem to rights follow that against have no the collateral. We should not deciding be taken as question, this however, since we leave it independent to an suit in which there is jurisdiction over proper parties. the or claims interests for treatment equitable fair and for reasonably not rejection is it; such that rejecting of those and interests rights respective light in the justified that facts; and the relevant it and all rejecting of those to (1) clauses requirements conforms plan subsection of this paragraph of the first inclusive, (3), supra.34 9, 205; see note § 11 U. S. C. . .” (e) . . F. findings. appropriate after confirmed plan at 390. Supp. rejec- despite plan of a for confirmation provision
This amend- the 1935 draft for in the appeared class by a tion comment.35 particular it caused no Apparently ments. expenses, They relate (2) (3) involved. are not Clauses fees and costs. Rep. p. Cong., Sess., 18. S. No. Rep. 1283, 74th 1st H. No. “Further, following statement: Cong., Sess., p. 1st contains 74th ac must be of stockholders of each class the consent of two-thirds proved it proceeding, is unless, by an valuation quired, elaborate This no interest. property so low that the stock has value of the is . . is effective obstruction. . an amended, provides defects, 1634, as remedy these S. “In order to upon plan will bind of each who vote that two-thirds of those class failing provides vote. But it also the dissenters those parties not may plan a fair where the do make effective court consent, will bind the agree. ... If two-thirds of each class judge may effective, But remainder of each class. make requirements accepted, if if it even not so he finds that conforms just stated, equitable provides fair for the interests of and treatment rejection rejecting reasonably it, justified those that their not light respective rights give provisions These and interests. complete process procedural standpoint, being due of law from there provision hearings full both before commission the court. powers Congress bankruptcy Within the broad under the clause as *32 recently Supreme declared the Court in Continental Illinois Bank Chicago, Ry. (55 v. & & Trust Co. Rock Island Sup. Co. Ct. Pacific 595), Rep. provisions process fully the also pro- afford due of law in tecting rights property the which are involved.” Hearings, Judiciary
See also Committee, House Cong., Sess., 74th 1st pp. 6249, 3, on H. R. Serial 15 and 22. by the think for confirmation provisions
We objection bank- are within the courts over creditors’ adequate ruptcy Congress. powers Those are powers ju- eliminate claims administrative valuations with require dicial and they adequate review are creditors to acquiesce adjustment claims, in a fair of their so as long gets creditor all value of his lien and his share any free assets.36
The grounds accepted by us in former sections of this opinion sustaining, as January 1,1943, as of the valuation of the road, the securities, allocation of the and treat- ment of cash, war earnings capital and reductions estab- lish that for the act of confirmation on 29,1944, November objection over the bondholders, finding General judge that the plan “adequate then provision made for fair equitable treatment” of the dissenters was justified. 62 F. In Supp. at 390. view of the district judge’s familiarity with the finding reorganization, this has especial weight with 52, us. See Rule F. P. R. C. There is no doubt that the then conformed to sub- section (b) and the other requirements para- of the first graph of (e). subsection supra. Note 9
This leaves for consideration question whether, fair plan being equitable June, 1943, effective January 1, 1943, the Generals reasonably justified were in rejecting by ballots cast between April 26 and July 15, 1944. pointed
As we Securities, have out under Allocation of supra, the Commission’s plan adopted 1942, after year greatest profit, and with anticipation the part on of the Commission might that there be other “big” years but with realization that profits the war were not a sound for higher basis valuation. reports Current of earnings 36 Wright v. Union Co., Central Ins. 311 U. S. at and discussion supra. p. at *33 have Nothing respondents part a of the record.
were in eco- improvement any indicates called to our attention any date July, 1944, or prospects nomic conditions ap- of the 1943, the date Commission’s June, since, over differ- justify treatment which would of the proval plan, in 1943.37 The the claimants accorded ent from that or the unreasonableness to the reasonableness challenge change any not based on rejection plan of the is of the District Court its approval since of conditions supra, note 9 (e), 25, 1943. Under subsection October after a vote automatically confirms a judge of each if two-thirds of creditors satisfied classes there rejection, If there is a accepted. have class that those who dissent to assure reexamination Apparently the equitable fair and treatment. have had from that for not differ this treatment does reexamination original paragraph under the first approval for the court (e). does, however, upon It center of subsection rejected plan. of those who rights rejection reasonably justified not unless the A would be is shown had a valid reason for their vote. As dissenters objections to by Judge Symes’ discussion of their confir- mation,38 payment their reasons were the senior consequent capitaliza- obligations with claimed release junior inadequate valuation, for tion securities and from particularly large plants view of the additions earnings. think that have demonstrated that We we adequate valuation, page there was an for the see basis seq., 512 et in senior debt were not that the decreases junior pp. 524-525, the account of the creditors. See Respondents ground no for their votes supra. offer other rejection. Congress stop with of sound purpose its blockade reorganization by power classes of creditors with veto Jersey City, 503, 515. Cf. I. C. C. 322 U. S. v. 3862 Supp. F. 384. statute, 35, supra, certainly of the 1933 note did not intend *34 to leave a class with the same power of interference be- judgment thought cause its reasonable that class valuation was erroneous or the creditors paid senior were If plan gives full the face value of securities. a fair and which equitable dissenters, treatment the elements plan equitable make the fair and basis for cannot be the If reasonably justified rejection. only a elements those upon, here, rejection are relied as is not reasonably justified. if course,
Of this does not mean that plan approved equitable as fair and court, the Commission and the justification rejection there cannot be a reasonable for its by a class of claimants on submission. make Reasons to rejection may their reasonable arise thereafter. For example, unanticipated, large earnings might develop. justification We see no reasonable here the action the General bondholders.
In conclusion,
foregoing opinion
we shall add that
duty
has been written without
heavy
upon
reliance
reorganizations
of the
eye
Commission to
with an
to the public interest as well as the
welfare of
private
creditors
stockholders.39 The Commission had this
duty mind. Our failure
upon
to comment more
feature of the
should
be
inti-
interpreted
not
as an
upon
part
mation
our
it is
important.
not
These
respondents cannot
upon
be called
to sacrifice their prop-
erty
depression-proof
so that a
system might
railroad
be
they
created. But
invested their
capital
public utility
obligation
that does owe an
public.
The Insurance
Group Committee, with fiduciary responsibility to the
myriad holders of policies, and the other investors or
(d),
supra.
473;
note 9
S.
ü.
at
speculators junior secu- speculators or investors or other eral bonds enterprise, railroad entry into a their rity issues, by reorgani- any in any depression risk that assumed be considered would public the interests zation trans- in an efficient That interest public well as theirs. requirements justifies the Commission’s system portation prop- improvement maintenance for reasonable for divi- prospects with fair capitalization erties and for a of securities.40 dends on all classes re- Appeals is Circuit Court of judgment of the of October of the District Court and the orders versed *35 1944, 29, November plan, the and of 1943, approving 25, are affirmed. confirming plan, the for further remanded to the District Court The cause is proceedings.
It is ordered. so will set forth dissents, and Me. Justice Frankfurter to be opinion his dissent an grounds the detailed for filed hereafter. in the consideration part
Mr. Justice Jackson took no of these cases. or decision * Frankfurter, dissenting.
Mr. Justice 1, 1935, On The Denver and Rio Grande November Company Western Railroad and The Denver and Salt (hereinafter Company compen- Lake Western Railroad diously debtor”), called “the initiated these proceedings reorganization their Act. Bankruptcy for under 77 of the § 11 (1935), 49 Stat. 911 U. 205. The of reor- plan § S. C. 40 Western R. Eastman, See concurrence of Commissioner Pacific Reorganization, Co. 233 I. C. 437. C. at 28,1946.
*Filed October Inter- ganization controversy approved by here the 14, state Commerce Commission on June 1943. 349, approved plan I. C. C. 385. The District Court necessary submission to the various classes of creditors. All Bankruptcy 54,562. C. C. H. Law Service classes ¶ except general mortgage accepted holders bonds plan. On claims of plan, the effective date of the these General Bondholders constituted about one-fourth of the debtor’s entire eighty percent debt. Just short of reject this class of creditors voted (79.33%) plan. Congress has right any reject made the class to subject power of a district court to override such if rejection, judge “is satisfied and finds . . . that such rejection justified is not reasonably light respective rights and rejecting interests of those it and all the relevant facts . . .” 911, (1935), 49 Stat. (e). U. S. C. 205 § The District Court on November requirements found that all the of the statute had met, been plan. Supp. confirmed the 62 F. 384. But Appeals strong the Circuit Court of for the Tenth Circuit, a bench, May 10, 1945, on “the found that General Bond- holders were within reasonably justified, meaning statute, rejecting plan, and that the District Court was authority without to confirm in the *36 face of their adverse vote.” 150 F. 2d 40. On fair a construction of the requirements Congress adju- for the dication of reorganizations, railroad applied to the situation before Ius, escape agreement cannot with the Circuit Appeals. Court of
Railroad reorganizations are so enshrouded the con- fusing high intricacies of finance that the true nature of decisive issues is too often lost to view. It may be useful appreciation to an of what appears to me to be the crux of put the case to a situation that is sufficiently analogous but much more familiar. In early the depression years the large a number
big companies life insurance foreclosed process, assume, we of farms. The foreclosure involved farm all its income a by judge. the control the began income, enough a fair hypothetical farm make if not pay company part, the insurance a considerable whole, of But paying the the annual interest. instead of interest, the judge applied money the the rebuild homestead, an barn, purchase adjacent to add a new field, machinery the most modern and additional head Thereby farm became far more valuable than cattle. company placed time any at since insurance mortgage Moreover, judge on it. retained as cash portion the bank of the income sufficient to off at pay twenty percent least mortgage. The farmer thinks ought he to be allowed to use the cash to reduce mortgage, given should be credit for the income which the judge used to make the improvements considerable which could have been used to reduce the mortgage. This would appear to be natural part attitude on the farmer, and it hardly would seem that he was not reason- justified ably to resist the claim of the company insurance farm, with improvements all its as well as cash in bank. simple
This analogy may look alongside almost trifling complicated details involved in a plan for reor- ganization of a system. railroad But is it an oversimpli- fication of the controlling issue, was the Circuit namely, Appeals Court wrong in holding that the General Bond- holders were “reasonably justified” in rejecting plan? Let the facts, clearly and fairly stated in the opinions below, speak for themselves. Judge Huxman thus sum- marizes the Court’s conclusion that the General Bondhold- ers had real grievance”: “a
“On November 1935, the Debtor’s total debts senior to the claim of the General Bondholders was slightly over $101,000,000. The General Bondhold- *37 $30,000,- approximately that time were claims at ers’ claims approximately the total of the two making reorganiza- plans Any of the ten of $131,000,000. one of prop- one fixed the value prior the final tion to satisfy the of all erty enough at than to claims more in this was full, proceeding bondholders date During intervening years, instituted. the ten Senior to more claim the Bondholders increased $139,000,000, than and that the General Bondhold- than $43,500,000, making ers more total of more a $182,000,000, required than two classes claims.
During all this period enjoyed the Debtor sub- income, stantial amounting $50,- approximately 000,000. using Instead payment this income in of interest making on senior it in claims, was used permanent lasting improvements in the road. More $43,000,000 than in way. used this None of these expenditures has comparable resulted increase or in any substantial final increase valuation, over the valuation prior making improvements. But as operation, a result of this the position of the General has Bondholders deteri- orated from a per cent participation in the amount of their claims to a mere ten cent. per Nor change does it the picture say that these improve- ments necessary were system. railroad fact still remains earnings in which all had a vital interest were used new building many railroad respects, which will be over handed to the Senior Bondholders, and the General Bondholders will prac- tically be eliminated aas result thereof.
But this alone does not entitle the General Bond- greater holders to a participation reorganized company. Neither it does condemn of reor- ganization or the capital structure up set therein. *38 expenditure involves the of railroad operation
The a It the formula- involves large operation. sums of judg- the of exercise operation plans tion dis- If, in the this exercise ment and discretion. the unwisely spent, viewpoint from cretion, funds are ag- creditors, may feel they all of the interest of complaint. legal no cause of they but have grieved, nor to, compelled was the Commission Neither in the of these justified adding amount would it be if in exer- capitalized value to the expenditures the reasonable it felt that of sound discretion cise earnings road, improve- after prospective However, it. in all justify ments did not the face of in this, satisfying full the after claims the senior bondholders, reorganization have should as all assets, made sure all excess current well as profits yet accrue, go excess war would General Bondholders. commission, pointed out, adopted as a con- sound
servative, prospective estimate of earn- ings reorganized it company. Por this is not to over-optimistic An again be criticized. view would courts, surely bankruptcy lead Debtor into the acquaintance with which it has had too much al- however, ready.7 We, feel that a there more than speculative probability that war these industries along which been well have constructed system, as the improvements which have been made
“7 system participated Properties included in this have railroad following reorganizations: in the The Denver & Rio Grande reorganization 1886; proceeding R. Co. a in a was successor the Rio & R. was reor Grande Western Co. the successor 1889; ganization proceeding companies two these consolidated Co.; & under the name of Denver Rio Grande R. reorganized present company again 1920 and in 1922 to 1924.” might net earnings, produce greater
use of these net If anticipated plan. than in the such should returns case, belong the General they certainly be the Seniors, not and the Bondholders and issuing It bring about. could be done should this General an additional amount Bondholders only stock which would receive returns subordinate *39 This is on suggestion from excess dividends. a mere binding and in no the part, our wise on Commission. in duty plan. is out defects the pointing Our limited It the of the Commission to correct responsibility them.
The Junction Bonds think We the as the manner complaint in which the Junction Bonds well were handled is wholly taken. Rio Grande Junction Railroad is a owned of It had out- subsidiary the Debtor. bonds in standing public for the payment the hands of the of which liable, totaling $2,758,333. the Debtor was This claim was that of the Bond- senior to General holders. The plan pay- set aside securities for the ment this In September 13, claim. an order dated 1943, the District Court pay directed the trustee to surplus hand, this claim with some cash on retained the securities which were be in used payment thereof the treasury company. The court treated the purchase transaction aas securities than rather a payment of a debt. This is upon a play words, and, any event, is immaterial to the issue. The fact remains that the new capitali- provided zation securities for the payment of these bonds. The value behind these securities in wise no belonged to the Senior Bondholders, because had they been paid surplus full. When cash was used to pay claim, this the value behind the securities set aside for that purpose remained undistributed. Since this full, had been satisfied Bondholders
Senior and fairness equity in all value undistributed Any plan Bondholders. to the General belonged with comply not it to them does give does not which Act.” e, sub. 77, of Section requirements F. 2d 38-39. me to seems to this case decision Inasmuch it I facts, deem adequate appreciation of turn on an analysis on quote the situation important his conclusion: Judge Phillips reached basis of which 1935, during depths “On November court depression, the debtor came into national At time the debtor’s senior reorganization. mortgage aggre- general ahead of the bonds debts gated and the slightly $101,000,000 over claim general aggregated about mortgage bondholders reorganization, a $30,000,000. With an immediate *40 ade- $132,000,000 would have been capitalization of quate give general mortgage new bondholders equal per capital- to 100 cent of their claim. stock No ever for in proposed debtor, ization valuation any plan presented, During has been that low. reorganization (in eight years’ delay nowise due general mortgage bondholders, but, at least part, to controversies senior among security hold- up 1, ers) January the effective date plan, claims of the senior security holders, due to the nonpayment accrual and interest, in- creased about $38,000,000. The debtor’s net income available for interest during the trusteeship to the end of 1944 amounted to $49,420,972. It exceeded by approximately $9,500,000 the interest charges which accrued on the claims of senior security holders to the end of that year. As of December 31, 1935, the debtor’s current assets $9,727,230 were less than its 1944, the As of December liabilities. current its current liabilities current assets exceeded debtor’s Thus, it will be seen there has $12,125,863.50. change a favorable the current situation of been and, since the was for- $21,853,093, moreover, mulated, paid the Junction Bonds have been obligations have been reduced equipment from $5,758,000, provided plan, the amount $4,540,000, a reduction in that requirement $1,218,000.
Approximately $43,000,000 of the income available, used, payment but not for the of interest has been expended permanent improvements and better- ments. While the investment value of the debtor’s thus property substantially increased, the Com- mission’s valuation, based on estimated future earn- not ings, was increased proportionately. As result, the claim of the senior security holders has increased and the participation of general mortgage bond- holders has been pressed downward until it is now 10 per fixed at cent of the new common stock. Many improvements and betterments referred to above have substantially increased capacity railroad to handle increased traffic as it arises. Cen- tral train control installed in many segments, where greatest density of obtains, gives traffic to those segments, in large degree, equivalent of a dou- ble-track railroad and increases the number of trains that can be operated over the road and the volume of traffic that can be handled by the road. Other of such *41 improvements have contributed to efficiency and economy in operations. These improvements have enabled the debtor to handle the great in increase traffic resulting from the war effort and placed have in debtor position to more economically and handle a efficiently volume of traffic in largely excess 544 condi- should future economic prewar traffic,
of its plan approved Under the such traffic. produce tions per cent of court, district confirmed of the senior to the holders goes common stock mortgage cent general and 10 per securities be a substan- result, As should there bondholders. postwar traffic over its increase the debtor’s tial traffic, earnings cent of the increased prewar per inure to the benefit of the holders of the senior will per general mortgage cent to the only securities claim was bondholders, per whose decreased cent discharge of the failure to interest by reason accruals with income available therefor and the diversion of permanent improve- such income to the cost of such me, It ments. seems to under all these circumstances, that, adjustments addition the other required to plan make fair and equitable, the Commission modify should endeavor to give so relief from situation lets impact the full of the im- provement program upon fall general claim the mortgage bondholders and them accords no corre- 40, sponding benefits.” 150 F. 28, 2d 41-43. From the confusing financial details one stark fact In emerges. 1939 the Commission found that the debtor would be able to enough earn provide future an income on one-third of the General Mortgage bonds. 233 515, I. C. In C. 592. reorganization 1943 the Commission concluded that the debtor would not earn enough provide on income more than one-tenth of the Mortgage General claims. 254 I. C. C. 380. The capitalization proposed by the Commission in 1943 eliminated as valueless more of the total claim Mortgage General bonds and more of the face amount of these bonds than did capitalization proposed by the Commission 1939. Since 1939 the debtor achieved a position permitting it to make large debt reductions and *42 charges. It accumu- its interest considerably to reduce its interest serv- large income excess of very a net lated operating costs large sums to decrease ice, expended it earning the future so that prospects, its business improve In the face increased. greatly the railroad was power of given were- security holders these factors the senior of all their claim but amount of only securities for the full not the reduction of for all cash accumulations available also in the financial Improvements the road’s indebtedness. to calculated patently structure of the road physical this road have future owners of profits increase the class of wiping out one substantially the basis of been made such as Inequitable consequences owners. present conclude that Appeals to these led the Circuit Court as a Congress satisfy the command plan failed must be reorganization plan judicial judgment matter equitable.” “fair and found find however, to necessary, it is not plan
To defeat the Congress equity. intrinsically wanting fairness and it reorgani- authorize the enforcement of did not judgment, judicial matter of found, zation once it is as a Congress wrote into law equitable.” be “fair and validity of a railroad and a vital condition to the another A itself as plan must also commend reorganization plan. classes of creditors. equitable” “fair and to the various if the rejects it, prevail only if can any And class rejection in finding is warranted that such District Court light respective justified not reasonably “is it and all the rele- rights rejecting and interests of those (1935), U. S. C. vant facts . . .” 49 Stat. (e). 205§ to vote on their inter-
Claimants who are thus entitled vote as altruists surely expected ests as a class are not behave as they more than are to be allowed to any Congress If which has unreasonable obstructionists. out, recognize written is not be we must stricken *43 in Congress lodged referendum which has each class class of self-protection by creditors as a means each On empty creditors and not as an occasion dialectic. power a fair and construction of the which Con- practical in gress fit the hands of the various place has seen classes, “reasonably creditor class can be deemed not a justified” right Congress in them exercising gave which interests, only say to vote their if a court can that no intelligent regardful inter- creditors, class of of their class ests, with obviously but not hostile to the common interest involved, objected which their class interest is could have plan. Any “reasonably other construction reads justified” In out the statute. effect that is what District Court, Court has done. And this with almost the silence, judicial candor of to sanction such appears deletion of what Congress has written. For it does not find that the General Bondholders reasonably justified were not point right from their intrinsic of view to exercise their reject the It little plan. does more than assert this con- clusion, apparently finding plan on the that fact “fair and equitable.” imposes judgment It its that plan was “fair and equitable” upon the General Bond- deprives right holders and thus effect them very which Congress gave judges them to be of their own inter- ests long so as the court say they cannot were capricious or greedy judgment. their This Court seems to be of if in judgment the view that plan its is equi- “fair and table,” it appear equally must fair equitable every class of creditors. judges Here three circuit found the plan equitable,” yet not “fair and this Court holds that the General Bondholders were not “reasonably justified” finding not it “fair and equitable.” only This can mean that redundant, Court deems and therefore eliminates, the Congressional requirement that before a plan can be approved, it must judg- commend itself to the ment of a class of creditors exercising judgment the kind of pursuit that men are entitled exercise their legitimate well self-interest, as commend itself to the judicial sense fairness.
In assuming if fair and equitable seems rejection court, by any to a must be of it class unreason- able, disregards the Court not only contrary assump- tion on basis Congress legislated. of which an Such attitude also practicalities oblivious of the situ- ation. To assume if a court a plan finds is “fair and equitable” no class of creditors can be reasonably justified in rejecting it, is to assume that the ascertainment of concerning complicated fairness so a situation as a *44 for a reorganization railroad’s lies in the realm of even approximate Quite certitude. the A opposite is true. court in ascertaining a is fair plan whether and equitable engaged ascertaining not indisputable It is facts. forming a judgment, largely and a prophetic judgment, regarding factors, maze a of and each as to factor there is usually for room considerable of opinion. difference It is for Congress this reason that it made a condition for judicial approval plan equi- that it fair appear and voting system by table the the classes of creditors. was, For an addition it by Congress made the rec- of legislation by ommendation Joseph Commissioner B. Eastman. As Coordinator, Federal he proposed to Congress that a court be authorized to confirm the reorganization plan despite the failure to obtain a majority vote one or more of the affected classes of creditors, provided that the district court was satisfied (1) two respects: plan that the adequate provi- “makes sion and equitable for fair treatment for the interests it”; claims those rejecting (2) and that judge the plan equitable” satisfied that is “fair and if “even not so approved” by a class of creditors. See Coordinator’s Annual for 1934, 101-102,237,238. Report pp. give interest public it in the deemed Congress
But than of creditors classes to the various greater protection Congress respects In several suggested. the Coordinator class vote disregard a courts to power limited by the safeguards proposed beyond the against plan a to note it is decisive present purposes For Coordinator. by the protection formulated Congress that added finding that requiring judge, that after by a Coordinator and must also be satisfied equitable,” is “fair and plan justified in rejection reasonably is not find “such that rights interests of those light respective I facts ...” cannot all the relevant rejecting it and in the hold, that to circumstances escape the conclusion reason- Bondholders were not case, of this that General justified plan is to decide that this ably rejecting Con- purposefully written into law requirement, judge gress requirement an addition to “fair is but a equitable,” must find the to be meaningless repetition requirement. in taking further this road undesirability delay where been more Court,
out of the District it has for than ought it press upon any is bound court. But decade, satisfy not lead to confirmation of a which fails to explicit laid prerequisites approval down Con- *45 gress, particularly where the is as as the so result drastic Circuit Appeals expert Court Com- Senate mittee on Interstate Commerce have made manifest. See S. Rep. 1170, Cong., 79th Sess., pp. 17-18, 40, 42, 2d 67-68,72-73,91-95,105-109,121-123.
Congress curtailed, has not any nor shown desire to restrict, right of self-protection which rail- gave it to road creditors Act of 1935 and to which the result this appears case indifferent. On the contrary, Con- gress given has since decisive proof disapproved it the construction which given courts have heretofore to 77, resulting in junior § undue harshness to interests and railroad It promoting concentration control. has rights emphatically junior indicated that the interests, reflecting public interests, carefully should be more safe- Congress been guarded. Whether has wise or unwise manifesting view is our this not business decide. it is the what I respect But business this Court find Congress be a clear enunciation the conditions which alone authorize courts sanction railroad reorganization. v. GREEN
COLEGROVE et et al. al. Argued 7, 8, No. 804. March 1946. Decided 1946. June