Opinion
No. 45839.
December 17, 1940.
Chester F. Leonard (of Davis, Polk, Wardwell, Gardiner Reed), of New York City, for Erie R. Co. and Nypano R. Co., debtors.
H.A. Taylor, of Cleveland, Ohio, for Trustees of property of Erie R. Co. and Trustees of property of Nypano R. Co.
Edward W. Bourne and Andrew Oliver (of Alexander Green), both of New York City and Clare M. Vrooman and Francis J. Amer (of Garfield, Cross, Daoust, Baldwin Vrooman), both of Cleveland, Ohio, for Group of Refunding and Improvement Mortgage Bondholders, acting under agreement dated February 18, 1938.
Edward E. Watts, Jr. (of Mitchell, Taylor, Capron Marsh), of New York City, and Russell C. Grahame (of McAfee, Grossman, Hanning Newcomer), of Cleveland, Ohio, for City Bank Farmers Trust Co., Trustee under First Consolidated Mortgage.
Jervis Langdon, Jr., of Cleveland, Ohio, for Chesapeake O. Ry. Co.
A. Marvin Braverman, of Washington, D.C., for Reconstruction Finance Corporation.
Frank Wiedemann, Asst. U.S. Atty., of Cleveland, Ohio, for United States Employees' Compensation Commission.
Willard P. Scott (of Oliver Donnally), of New York City, for Mutual Savings Bank Group Committee.
Richard J. Mackey, of New York City, for Anna Petkewicz, adm'x.
George G. Reynolds (of Winthrop, Stimson, Putnam Roberts), of New York City, and Ernest C. Dempsey (of Squire, Sanders Dempsey), of Cleveland, Ohio, for Guaranty Trust Co., Trustee under Erie R. Co. General Mortgage, Erie Jersey R. Co. First Mortgage, and Genesee River R. Co. Mortgage.
Kingsley Taft (of McKeehan, Merrick, Arter Stewart), of Cleveland, Ohio, for Chase Nat. Bank of New York, Trustee under New York Erie R. Co. Third Mortgage.
Louis M. Stevens (of Stradley, Ronon Stevens), of Philadelphia, Pa., for Bondholders Protective Committee for Refunding and Improvement Mortgage 5% Bonds of Erie R. Co.
John T. Scott and Brooks W. Mccracken (of M.B. H.H. Johnson), both of Cleveland, Ohio, for Commercial National Bank Trust Co. of New York, temporary successor trustee under New York Erie R. Co. Second Mortgage.
Frank L. Pinola, of Wilkes-Barre, Pa., and Lawson Barnes, of Syracuse, N.Y., for Miners Savings Bank of Pittston and Bondholders Protective Committee for General Mortgage Convertible 4% Bonds of Erie R. Co.
W. Lloyd Kitchel (of Cadwalader, Wickersham Taft), of New York City, and William H. Bemis (of Baker, Hostetler Patterson), of Cleveland, Ohio, for Bankers Trust Co., Trustee under Refunding and Improvement Mortgage.
Jerome C. Fisher (of Thompson, Hine Flory), of Cleveland, Ohio, for National City Bank of Cleveland, Trustee under New York, P. O. Prior Lien Mortgage.
Proceeding in the matter of the Erie Railroad Company, debtor. On objections to plan of reorganization.
Order approving plan.
The Report of Special Master William L. West, on Objections to Plan of Reorganization, follows:
Under date of April 6, 1940, the Interstate Commerce Commission issued its report and order approving a Plan of Reorganization for the Erie and the Chicago Erie (Printed Court Record pp. 2391-2576). A supplemental report and order modifying the original Plan, and approving said Plan as modified, was issued by the Commission on July 8, 1940 (C.R. 2791-2849). The original and supplemental reports and orders of the Commission (hereinafter referred to as the "Plan") were duly certified to this court by the Commission, and were filed with the Clerk on the 12th day of July, 1940.
On July 12, 1940, the court issued Order No. 236 (C.R. 2851) requiring the filing of objections to the Plan, and referring any and all such objections to the undersigned as Special Master, to hear and consider the same and promptly report his findings and recommendations to the court. Said order further directed that a hearing be held before the undersigned on August 12, 1940, on any and all objections filed to the Plan.
Pursuant to said order of court, objections to the Plan were duly filed by the following interested parties:
1. Bondholders' Protective Committee for the Refunding and Improvement Mortgage 5% Bonds of the Erie;
2. Miners Savings Bank of Pittston and the Bondholders' Protective Committee for the General Mortgage Convertible 4% Bonds of the Erie;
3. Anna Petkewicz, as Administratrix of the Estate of Ignac Petkewicz, Deceased;
4. The Commercial Trust Company of New Jersey as Trustee under the Mortgage of the New York, Lake Erie Western Docks and Improvement Company.
In addition to the foregoing formal objections, letters in the nature of objections to the Plan were received by the Clerk from William F. Wissman, Charles D. Penniston and Joel E. Fisher.
The following parties have indicated their support of the Plan, either through statements of counsel made at the hearing of August 12, or by written statements of their position filed in this proceeding: the debtor, the Chesapeake Ohio Railway Company as majority stockholder, the Group of Holders of Erie Railroad Company Refunding and Improvement Mortgage Bonds (hereinafter called the "Institutional Group"), the Mutual Savings Bank Group Committee, the Railroad Credit Corporation, City Bank Farmers Trust Company as Trustee under the Erie Railroad Company First Consolidated Mortgage, Bankers Trust Company as Trustee under the Refunding and Improvement Mortgage, and Guaranty Trust Company of New York as Trustee under the Erie Railroad Company General Mortgage and as Trustee under the Genesee River Railroad and the Erie and Jersey Railroad Companies First Mortgages.
On August 12, 1940, a hearing was held on the objections to the Plan. Some testimony was received and certain exhibits were introduced in evidence. Thereafter, briefs in support of the objections of Anna Petkewicz, the Protective Committee for the Refunding and Improvement Mortgage Bonds, the Protective Committee for the General Mortgage Convertible Bonds and Miners Savings Bank of Pittston were filed on behalf of those parties. No briefs were filed in support of the objections of the Commercial Trust Company of New Jersey as Trustee under the mortgage of the New York, Lake Erie Western Docks and Improvement Company, or in support of the letter objections of William Wissman, Charles D. Penniston and Joel E. Fisher.
Briefs in support of the Plan, and in opposition to the several objections, were filed by the Debtor, the Chesapeake Ohio Railway Company, the Institutional Group and the Mutual Savings Bank Group Committee. A brief in opposition to the claim of Anna Petkewicz to preferential payment was filed by the Debtor Trustees.
Objections of the Bondholders' Protective Committee for the Refunding and Improvement Mortgage Bonds.
This Committee (hereinafter sometimes called the "Perry Committee") objects to those provisions of the Plan approved by the Commission which relate to the issuance and allotment of any common stock of the reorganized company to present preferred and common stockholders of the Erie. The Objector contends that the approved Plan is unfair and inequitable, in that, without satisfying the prior claims of the Refunding and Improvement Mortgage Bondholders (hereinafter called "Refunding Bondholders") and in disregard of the prior rights of such Bondholders, it allots to present preferred and common stockholders of the Erie one share of new common stock for each five shares of preferred and common stock now held (C.R. 2518-19, 2820).
It is recognized here that adequate provision must be made in a plan of reorganization for all classes of creditors before stockholders may be permitted to participate in the reorganized company. Northern Pacific Ry. Co. v. Boyd, (1913) 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931; Louisville Trust Co. v. Louisville, N.A. C. Ry. Co., (1899) 174 U.S. 674, 19 S.Ct. 827, 43 L.Ed. 1130; Kansas City Terminal Ry. Co. v. Central Union Trust Co., (1926) 271 U.S. 445, 46 S.Ct. 549, 70 L.Ed. 1028; Case v. Los Angeles Lumber Products Co., (1939) 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110. On the other hand, it is also recognized that if the value of the property is sufficient "to satisfy all * * * claims prior to stock and allow some equity for preferred and common stock of the Erie", such stockholders are entitled to participate in the reorganized company "within the limits of the equity remaining * * * after satisfying senior claims" (C.R. 2500, 2518). Section 77, sub. e, 11 U.S.C.A. § 205, sub. e; In re A.C. Y. Ry. Co., D.C., N.D. Ohio E.D., 1939, No. 28,282; Taylor v. Standard Gas Electric Co., 1939, 306 U.S. 307, 324, 59 S.Ct. 543, 83 L.Ed. 669; Standard Gas Electric Co. v. Taylor, 10 Cir., June 29, 1940, 113 F.2d 266; In re Porto Rican American Tobacco Co., 2 Cir., 1940, 112 F.2d 655; In re Consolidated Rock Products Co., 9 Cir., June 19, 1940, 114 F.2d 102. These principles are clearly included within the meaning of the phrase "fair and equitable" as used in Section 77. Case v. Los Angeles Lbr. Products Co., supra.
For opinion of Circuit Court of Appeals, see 117 F.2d 966.
This Objector contends that the equity of the present Erie stockholders is without value and that such stockholders, therefore, are not entitled to participate in the reorganized company, except to the extent of receiving warrants entitling them to purchase new common stock at a designated price per share. Accordingly, it is argued that the Commission has approved a Plan without making any finding as to the value of the properties of the Erie and the Chicago Erie for the purpose of justifying the proposed capital structure of the reorganized company or of justifying the proposed distribution of new common stock to present stockholders.
In view of these contentions, it is necessary, first, before considering the treatment of the Refunding Bondholders, to consider the problem of the valuation of the properties of the Erie and the Chicago Erie in order to determine whether or not present Erie stockholders are entitled to participate in the reorganized company under the principles hereinbefore mentioned.
In its report of April 6, 1940, the Commission found "from a consideration of earnings, past, present and prospective * * * that a reasonable capitalization of the Erie and the Chicago Erie is not in excess of $333,000,000., inclusive of notes issued to obtain new money. This capitalization is sufficient to satisfy all of the above claims prior to stock, and allow some equity for preferred and common stock of the Erie" (C.R. 2500). Accordingly, the Plan approved by the Commission provides for a total capitalization of $332,692,250., excluding leased lines but including $14,000,000. of notes issued to obtain new money (C.R. 2543).
Although the Objector argues that the foregoing finding is not a finding of value for the purpose of justifying the proposed capital structure or of justifying the proposed distribution of new common stock, I see no escape from the conclusion that the Commission's finding of permissible total capitalization, when considered in conjunction with the Plan as a whole and the proposed capital structure, is tantamount to a finding of value, and definitely reflects the Commission's appraisal of the assets of the Erie and the Chicago Erie for reorganization purposes, excluding leased lines, but including such assets as will be acquired by the $14,000,000 of new notes not used in paying claims. Any objection to the form or adequacy of the Commission's finding could, and should, have been raised by Objector before the Commission by petition to modify the report, as provided in Section 77, sub. d.
Inasmuch as the approved total capitalization of $332,692,250 exceeds the undisputed amount of the total liabilities of the company under reorganization, it necessarily follows that some equity remains for present Erie stockholders "after satisfying senior claims" (C.R. 2518), unless the Commission's total capitalization figure is excessive.
The question, therefore, is whether the Commission, in determining the amount of the total capitalization of the reorganized company, properly appraised the assets of the Erie and the Chicago Erie for reorganization purposes.
Under Section 77 the court has no authority comparable to that of the Commission to formulate a plan of reorganization. The court's power is to approve or disapprove a plan. If a plan is disapproved, the court must either "dismiss the proceedings" or "refer the proceedings back to the Commission for further action" (Section 77, sub. e). The plan shall be approved, however, if the court is "satisfied" on certain points specified in Section 77, sub. e. In that connection, the court has a duty to exercise an independent judgment in determining whether or not the plan complies with the requirements of the statute. At the same time, it is to be recognized that the Commission is clothed with certain functions and primary responsibilities, one of which is to determine, if necessary, the value of "any property for any purpose under this section" (Section 77, sub. e). The last paragraph of subsection e provides: "The value of any property used in railroad operation shall be determined on a basis which will give due consideration to the earning power of the property, past, present, and prospective, and all other relevant facts. In determining such value only such effect shall be given to the present cost of reproduction new and less depreciation and original cost of the property, and the actual investment therein, as may be required under the law of the land, in light of its earning power and all other relevant facts." It is obviously impossible to fix with mathematical exactness the value of a large railroad system. Accordingly, except in cases where there can be no reasonable difference of opinion, the problem of determining the value of railroad property calls for the exercise of "reasonable judgment." Rowley v. Chicago Northwestern R. Co., 1934, 293 U.S. 102, at page 109, 55 S.Ct. 55, at page 58, 79 L.Ed. 222. In that case the Supreme Court said: "The ascertainment of the value of a railway system is not a matter of arithmetical calculation and is not governed by any fixed and definite rule. Facts of great variety and number, estimates that are exact and those that are approximations, forecasts based on probabilities and contingencies have bearing and properly may be taken into account to guide judgment in determining what is the money equivalent — the actual value — of the property." Citing cases.
Although the Rowley case involved a question of taxes on a railroad property, the foregoing quotation is equally applicable to a reorganization, especially as Section 77 prescribes no precise formula for determining the value of property used in railroad operation, but merely directs that "due consideration" be given to "earning power," past, present, and prospective "and all other relevant facts," with only such effect given to reproduction and original costs, and actual investments, as may be required under the law of the land in light of the earning power and all other relevant facts (Section 77, sub. e). Any attempt to forecast the future "earning power" of a railroad system obviously involves matters of opinion, which call for the exercise of a reasonable judgment.
Inasmuch as the problem of valuation is one for the Commission under Section 77, sub. e, and not only involves matters of opinion, but also involves a matter affecting the public interest, which comes within the primary if not the exclusive jurisdiction of the Commission under Section 77, sub. d, it is my opinion that the Commission's determination of the value of the properties of the Erie and the Chicago Erie for reorganization purposes — i.e. the total capitalization — is conclusive unless it clearly appears (1) that the Commission applied improper standards of valuation, or (2) that its finding is wholly unsupported by the evidence. Atlanta B. C.R. Co. v. United States, 1935, 296 U.S. 33, 56 S.Ct. 12, 80 L.Ed. 25; In re Western Pac. R. Co., D.C.N.D.Cal., Aug. 15, 1940, 34 F. Supp. 493; see also report of Special Master in A.C. Y. Ry. Co., D.C.N.D.Ohio E.D., No. 28,282. This conclusion is not inconsistent with the view that the court is required to exercise an independent judgment in determining that the Plan complies with the requirements of Section 77.
For opinion of Circuit Court of Appeals, see 117 F.2d 966.
The Objector's contention that the Commission's total capitalization figure is excessive and is not supported by the evidence is based largely on the fact that the average earnings of the Debtor over certain different periods in the past, if capitalized at 5%, fail to produce a sum equal to the total capitalization figure. If the value of a railroad system is to be determined solely by the mechanical capitalization at 5% of its earnings over different periods, and without regard to other relevant facts, then it would appear that the Commission's figure is somewhat excessive. However, as indicated by the last paragraph of Section 77, sub. e, earnings are not the sole criterion of value, although "earning power" is a most important factor. The earnings available for any particular period are not as important a consideration in determining value as the actual or potential earning power of the property over a considerable range of time. The Commission obviously did not regard the results obtained by capitalizing earnings at 5% as the sole measure of the value of the properties of the Erie and the Chicago Erie. And there is no requirement that it should have done so.
The record here, in addition to containing the earnings figures cited by the Objector, contains much other evidence which is material to a consideration of valuation. This evidence includes earnings figures reported by years from 1921 to date, showing income available for fixed charges, excluding coal company dividends, ranging from a low in 1922, the year of the railway strike, to $22,229,249 in 1929 (Debtor's Plan, page 29, Exhibit 122; Exhibit 133). It is to be observed that the earnings available for interest in 1936, and for the year ended June 30, 1937 (C.R. 2499, 2500), were more than sufficient to cover all charges under the proposed capital structure (including capital and sinking fund requirements and dividends on the preferred stock) if the Plan had been in effect during those periods.
There is also evidence that the estimated physical valuation of the properties of the Erie system, plus a valuation of securities owned and allowance for working capital, was $434,613,372. as of September 30, 1938 (Debtor's Plan, p. 32, Exhibit 122), as well as testimony concerning the operating efficiency and maintenance of the road and equipment (C.R. 2407-12). According to the evidence, the adjusted capitalizable assets as of December 31, 1939, amounted to $512,640,004. based on pro-forma balance sheet (Exhibit 215).
The Chesapeake Ohio's forecast of earnings for the period 1939-43, inclusive, shows $14,303,514 available for fixed charges as compared with the Debtor's estimate of $9,803,514. for the same period (C.R. 2431-33). In this connection, however, it may be pointed out that the Debtor's estimate of future earnings was admittedly intended to be used only as a basis for fixed charges (Commission Tr. 270, 271) and was referred to by the Commission as being "very conservative" (C.R. 2431).
It is unnecessary here to repeat all of the valuation evidence referred to by the Commission in its report of April 6, 1940 (C.R. 2407-17, 2428-32, 2499-2501). It appears, however, from a consideration of the entire record, that the Commission's determination of total capitalization is adequately supported by the evidence. Moreover, there is no evidence that such determination was not made in accordance with the applicable legal requirements of the statute.
The Commission, in its report, does not expressly adopt or reject any of the evidence on the subject of valuation and, save for the statement that its finding of permissible total capitalization was made "from a consideration of earnings, past, present and prospective" (C.R. 2500), the grounds of its determination are not set forth. The Commission, however, is not required under the statute to make any formal or precise findings of fact, nor is it required to adopt any precise formula which accords specific weights to the different factors which may be considered in determining a proper total capitalization. Hence a complete statement of the grounds of its determination is not essential. United States v. B. O.R. Co., 1935, 293 U.S. 454, 464, 55 S.Ct. 268, 79 L.Ed. 587. In the absence of a showing to the contrary, it may not be assumed that the Commission failed to give appropriate consideration to all of the relevant facts.
Inasmuch as the question of valuation involves matters of opinion, and as it appears here that the Commission did not act arbitrarily or without substantial evidence, I conclude that its determination of a proper total capitalization of the company under reorganization should be sustained.
As hereinbefore observed, the amount of the total liabilities of the reorganized company is less than the amount of the approved total capitalization. The difference between those two figures, amounting to $22,439,031., represents the value of the "equity remaining for stockholders after satisfying senior claims." (For methods of computing the amount of this equity, see C. O. Brief dated August 24, 1940, pp. 6, 7, and Debtor's Brief dated August 23, 1940, pp. 24, 25.) According to well established principles, the present Erie stockholders are entitled to participate in the reorganized company within the limits of their equity as determined by the Commission. In view of the fact that some equity exists for stockholders, this case is readily distinguishable from Case v. Los Angeles Lbr. Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110, where the insolvency of the Debtor obviously precluded any allotment of stock to stockholders.
This now brings us to a consideration of whether or not the Plan accords due recognition to the claims of the Refunding Bondholders.
The Refunding Bonds are secured by the pledge of substantial amounts of bonds of senior Erie Mortgages, by certain additional collateral security, and by a junior lien on the bulk of the Erie system (C.R. 2421). The total claim of such Bondholders, represented by the publicly held bonds, amounts to $111,041,667, including interest to January 1, 1940 (Objections, p. 2).
Under the Plan, Refunding Bondholders are given new fixed interest bonds, income bonds, and preferred stock having an aggregate face or par value of $36,500,000, in recognition of their senior interests consisting of pledged collateral. The remainder of their claim for principal and interest — amounting to $74,541,667 — is recognized by the allotment of 2,005,605 shares of new common stock out of a total of 2,560,341.2 shares to be issued (C.R. 2544.) The remaining shares of new common stock are to be distributed to unsecured creditors and present preferred and common stockholders of the Erie.
Unsecured creditors will receive in full satisfaction of their claims, one share of new common stock for each $40 in amount of such claim (C.R. 2820). As unsecured claims, including lease liabilities, are estimated at $5,000,000, an estimated total of 125,000 shares of such stock will be distributed to general creditors.
Present preferred and common stockholders will receive under the Plan one share of new common stock for each five shares of preferred and common now held (C.R. 2820). This will result in the distribution of 429,736.2 shares of new common stock to present stockholders in recognition of the value of their equity in the property. In addition to the allotment of new common stock, present Erie stockholders are to receive purchase warrants entitling them to purchase 1¼ shares of escrowed stock for each share of preferred or common stock now held, at any time before January 1, 1945, for $37.17 a share, plus interest as specified in the Plan (C.R. 2839).
The Perry Committee maintains that the Plan is unfair and inequitable to Refunding Bondholders in that the allotment of 2,005,605 shares of new common stock to such bondholders (in addition to $36,500,000 of senior securities) does not fully satisfy their claims. The Objector contends that the probable future earnings of the reorganized company will not be sufficient to pay a dividend on the new common stock equal to 5% of the value which that stock represents to Refunding Bondholders. It is likewise contended that it is improbable that the new common stock will attain a market value equal to the value at which it is allotted to Refunding Bondholders. These contentions apparently are based on the belief that such earnings and such market value are necessary in order to "satisfy" the claims of the Refunding Bondholders. There is no requirement as a matter of law, however, that new securities issued in a reorganization will immediately earn an amount equivalent to the interest on the old securities, or that, immediately following reorganization, such new securities will attain a market value equivalent to the face amount of the claim which they represent, before junior security-holders may participate.
Although the law does not require, as a condition to the "satisfaction" of claims of creditors, that the reorganized company immediately earn full interest or dividend charges on the new securities distributed to such creditors, it may be pointed out that the evidence here shows that the Debtor's earnings available for interest and dividends for the year 1936 and for the year ended June 30, 1937 (C.R. 2499-2500), were sufficient, if the Plan had been in effect during those periods, to show some "earnings" on the new common stock under the proposed capital structure, after providing for all charges ahead of such stock. The amounts available for dividends on the new common stock during the periods referred to would be materially increased if capital and sinking fund requirements were excluded in calculating such "earnings," and if the reduction in rents for leased roads and equipment, which may reasonably be expected if the Plan becomes effective, is taken into account. (See Institutional Group Brief dated August 23, 1940, pp. 96, 97; Debtor's Brief dated August 23, 1940, p. 20.) What the earnings may be in the future is a matter of opinion, but Objector's belief that there is "no reasonable prospect" of earnings on the new common stock under the proposed capital structure is scarcely justified from the evidence of the past and present earnings of the Debtor.
The "familiar rule," reaffirmed in Louisville Trust Co. v. Louisville, N.A. C. Ry. Co., 174 U.S. 674, 19 S.Ct. 827, 43 L.Ed. 1130, and cited with approval in the Los Angeles Lumber Products case, 308 U.S. 106, 60 S.Ct. 1, 7, 84 L.Ed. 110, to the effect that "the stockholder's interest in the property is subordinate to the rights of creditors," does not "require the impossible" and make it necessary to pay creditors in cash, or its "immediately realizable equivalent," before stockholders may be permitted to participate in the reorganized company. In re Radio Keith Orpheum Corporation, 2 Cir., 1939, 106 F.2d 22, certiorari denied Cassel v. Radio-Keith-Orpheum Corp., 308 U.S. 622, 60 S.Ct. 377, 84 L.Ed. 519. It is recognized that the interest of any class of creditors can be preserved by the issuance "on equitable terms" of new securities. Northern Pacific R. Co. v. Boyd, 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931.
As hereinbefore observed, the total claim of the Refunding Bondholders for principal and interest amounts to $111,041,667. Under the Plan such Bondholders are allotted new fixed interest bonds, income bonds and preferred stock having an aggregate face or par value of $36,500,000 in recognition of their senior interests consisting of pledged collateral. The remainder of their claim, amounting to $74,541,667, is recognized by the allotment of 2,005,605 shares of new common stock. On this basis, one share of the new common stock allotted to such Bondholders represents approximately $37.17 of their total claim. Accordingly, the entire claim of the Refunding Bondholders for principal and interest is recognized in full in some form of new securities, taken at a fair value, prior to the recognition of claims of unsecured creditors, and the equity of present stockholders. Such treatment does not violate the principles of the Boyd case and other related authorities.
The approved Plan is not "unfair," or subject to objection on the ground that it fails to preserve priorities between different classes of creditors and stockholders merely because it provides for the distribution of new common stock, in different amounts, to the Refunding Bondholders, the unsecured creditors and present stockholders. The principle that priorities may be recognized by the allocation of the same class of security to different classes of existing security-holders on a quantitative basis was recognized by the Supreme Court in Kansas City Terminal Ry. Co. v. Central Union Trust Co., 1926, 271 U.S. 445, at page 456, 46 S.Ct. 549, at page 552, 70 L.Ed. 1028, where the court said: "Circumstances may justify an offer of different amounts of the same grade of securities to both creditors and stockholders." This principle of a quantitative preference, as distinguished from a qualitative preference, has been followed in other railroad reorganizations under Section 77, as well as in reorganizations under Section 77B, 11 U.S.C.A. § 207, or Chap. X, 11 U.S.C.A. § 501 et seq., and has received the approval of those courts which have passed on the question. In re Chicago Great Western R. Co., 228 I.C.C. 585, plan approved, D.C.N.D.Ill. 1939, 29 F. Supp. 149; In re Chicago Eastern Ry. Co., 230 I.C.C. 199, plan approved, D.C.N.D.Ill., June 16, 1939, No. 52871; Louisiana N.W.R. Co., D.C.S.D.N.Y. 1939, 36 F. Supp. 639; In re Georgian Hotel Corp., 7 Cir., 1936, 82 F.2d 917, certiorari denied 298 U.S. 673, 56 S.Ct. 939, 80 L.Ed. 1395; In re Radio Keith Orpheum Corp., 2 Cir., 1939, 106 F.2d 22, certiorari denied Cassel v. Radio-Keith-Orpheum Corp., 308 U.S. 622, 60 S.Ct. 377, 84 L.Ed. 519; In re Utilities Power Light Corp., D.C.N.D.Ill. 1939, 29 F. Supp. 763; In re Porto Rican American Tobacco Co., 2 Cir., 1940, 112 F.2d 655.
No opinion for publication.
Under the present Plan, the respective priorities of the Refunding Bondholders, the unsecured creditors, and present stockholders, are preserved within the requirements of the Boyd case doctrine, by the different rates at which the new common stock is allotted to those security holders and claimants. Thus, unsecured creditors receive such stock in full satisfaction of their claims on the basis of one share for each $40 of claim. Refunding Bondholders are allotted such stock at a slightly lower rate, i.e. $37.17 per share, in recognition of their lien position. Present preferred and common stockholders will receive the new common stock at a higher rate than either the bondholders or the unsecured creditors, i.e. at approximately $52.22 per share, or one share for each $500 par value of present stock. Under the circumstances, it is my conclusion that the treatment accorded to the Refunding Bondholders is in accordance with established principles, and meets the statutory and judicial standards of fairness.
The Perry Committee has objected to the provision in the Plan whereby present stockholders may exercise warrants for the purchase of additional shares of new common stock at any time before January 1, 1945. (C.R. 2838-9). The Objector contends that such period should be limited to one or two years at the most. Under all the circumstances, the period provided in the Plan is not unreasonable.
Objections of Miners Savings Bank of Pittston and Bondholders Protective Committee for the General Mortgage Convertible Bonds.
The objections filed jointly by Miners Savings Bank of Pittston and Bondholders Protective Committee for the General Mortgage Convertible Bonds (both referred to herein as the "Convertible Committee") relate to the treatment of the General Mortgage Convertible 4% Bonds of the Erie (hereinafter referred to as "Convertible Bonds").
These Objectors maintain that the Plan is unfair and inequitable to the holders of the Convertible Bonds in that it fails to afford due recognition to the rights of such bondholders.
The General Mortgage which secures the Convertible Bonds is a lien upon the properties and securities covered by the Erie First Consolidated Mortgage under which the Prior Lien Bonds and the General Lien Bonds are issued and with respect to all of such properties and securities is subject to that mortgage and to the various liens underlying it (C.R. 2419-20). In addition to the foregoing, the Convertible Bonds are secured by the pledge of the stock of the following companies (C.R. 2420):
Company Par Value of Stock Delaware Valley Kingston Railway Co. ....................... $ 250,000 New York, Susquehanna Western Railroad Co. Pref ......... 6,630,000 New York, Susquehanna Western Railroad Co. Comm. 6,630,000 Penhorn Creek Railroad Company ...... 6,000 Erie Wyo. Valley Railroad Company ........................... 1,500,000 Pennsylvania Coal Company ........... 5,000,000
The total claim of the Convertible Bondholders, representing bonds actually outstanding and pledged, exclusive of bonds held by banks in safekeeping, is $28,419,600 of principal and $2,557,764 of accrued and unpaid interest to January 1, 1940, a total of $30,977,364 (C.R. 2507). Bonds outstanding in the hands of the public total $21,324,700 in principal amount and interest thereon to January 1, 1940, is $1,919,223, a total of $23,243,923 (C.R. 2416, 2544).
Under the Plan the publicly held Convertible Bonds will be exchanged for 25% in new fixed interest bonds, 25% in income bonds, and 59% in preferred stock, a total of 109% representing principal and accrued interest to January 1, 1940 (C.R. 2508, 2516-17).
The objections relate to the treatment of $21,324,700 principal amount of the publicly held convertibles. Objectors contend that there should be allocated to such publicly held bonds new fixed interest bonds in an amount equal to 100% of the total claim for principal and interest or, in the alternative, that the capital stock of the Pennsylvania Coal Company be distributed to the holders of such bonds and new fixed interest bonds be allotted for the balance of the claim of such bondholders (Obj. p. 2). At the hearing held August 12, 1940, on objections to the Plan, counsel for the Convertible Committee receded somewhat from the position taken in the written objections and indicated that the holders of Convertible Bonds should receive at least 50% of their claim in new fixed interest bonds and the remainder in income bonds (Tr., p. 113, Hearing August 12).
In support of their claim for a greater allotment of fixed interest and income bonds, the Objectors contend that the value of the stocks pledged as security for the Convertible Bonds requires that the claim of such Bondholders be accorded more favorable treatment than that provided in the Plan.
The Objectors concede that the Delaware Valley and the New York, Susquehanna Western stocks have little or no value, and need not be taken into account in allotting new securities to the Convertible Bondholders. Nor is it strenuously urged that adequate consideration has not been given to the Penhorn Creek stock (Tr., p. 108, Hearing August 12). It is maintained however, that in allocating new securities to the Convertible Bondholders the Commission has failed to give adequate recognition to the value of the stocks of the Pennsylvania Coal Company and the Erie Wyoming Valley Railroad Company.
According to the application of the formula for the segregation of income among leased and mortgaged lines of the Erie system (Ex. 126 A, B, C, D, E), the Erie Wyoming Valley showed earnings at the rate of $1,255,812 per annum. The physical valuation of such property is $9,459,295, representing cost of reproduction new, plus the value of land, plus additions and betterments, but making no deduction for depreciation (Ex. 128, C.R. 2507). It is also shown by the evidence that substantial revenues accrue to the remainder of the system on account of traffic originated and terminated on the Erie Wyoming Valley (C.R. 2483; Obj. Brief dated August 24, 1940, p. 7).
The assessed valuation of the properties of the Pennsylvania Coal Company was $11,205,790 as of January 1, 1937, including property leased from others (Ex. 253). The stock of that company was valued at $5,000,000 by the Debtor for the purposes of the total capitalization which it proposed in its plan (Ex. 122, p. 61). According to the evidence, this stock paid substantial dividends in former years, but has paid none at all since 1935. From 1930 to 1937-38, the mines of the Pennsylvania Coal Company were operated by the Pittston Company. Because of the failure of that company to operate the mines profitably, the lease was cancelled in August of 1938, and the properties were returned to the Pennsylvania Coal Company, which has since leased all but two of the mines to independent operators on a royalty basis. The two mines not under lease are now being operated by the Company. The earnings of the Pennsylvania Coal Company were estimated at $125,000 for 1938 (C.R. 2483, 2507), but were less than that in 1939, amounting to only $61,633.71 (Obj.Ex. 1, Hearing August 12). For the first six months of 1940, the net earnings of the Coal Company were $332,000 as compared with $196,475 for the same period of 1939 (Obj.Ex. 2, Hearing August 12).
In view of the foregoing evidence of the physical and assessed valuations of the two properties, and in view of the earnings of the Erie Wyoming Valley, as shown by the application of the formula, as well as because of the increased earnings of the Pennsylvania Coal Company, as shown by its earnings for the first six months of 1940, the Objectors contend that the Convertible Bondholders are entitled to a greater allotment of fixed interest and income bonds.
The right of the Convertible Bondholders to fixed interest bonds for a portion of their claim is unquestioned, due principally to the stocks of the Erie Wyoming Valley and the Pennsylvania Coal Company, which are pledged as collateral (C.R. 2505). However, for the purpose of determining "fair and equitable" treatment of such Bondholders, it must be borne in mind that the Convertible Bonds are predominantly a junior lien on the Erie system, for, with the exception of the stocks pledged as collateral, the security for such bonds is in all, or virtually all, respects subject to the prior rights of the Prior Lien and General Lien Bonds issued under the First Consolidated Mortgage.
The claim of the Prior Lien Bondholders amounts to $38,500,000 inclusive of interest to January 1, 1940, while the claim of the General Lien Bondholders as represented by the publicly held bonds amounts to $39,033,500 including interest to the same date (C.R. 2418, 2544). Additional General Lien Bonds include $400,000 principal amount owned by an Erie subsidiary and $48,675,150 principal amount pledged, or held by banks for safekeeping (C.R. 2418). The Prior Lien and General Lien Bonds are subject in turn to $44,234,000 of prior liens (C.R. 2418). Hence, the junior lien position of the Convertible Bonds must be recognized unless it appears, as contended by Objector, that their collateral first lien interests, consisting of pledged stocks, are sufficiently important to justify giving them priority over the General Lien Bonds.
In determining the proper amount of new senior securities which can fairly be allotted to the Convertible Bondholders on account of their collateral first lien interests, certain factors affecting the values of the Erie Wyoming Valley and the Pennsylvania Coal Company must be given consideration.
That the Erie Wyoming Valley is of substantial value, particularly when considered in connection with the Pennsylvania Coal Company, is not questioned. It appears, however, that the principal immediate value of the Coal Company does not lie in the company itself, but in the traffic contribution made by it to the Erie (C.R. 2483-4). Substantially all of the traffic over the Erie Wyoming Valley is anthracite coal traffic principally from the mines of the Pennsylvania Coal Company. The evidence shows that the Coal Company has coal reserves of approximately 65,500,000 tons. If mining continues at the present rate of about 4,000,000 tons per year, the reserves will be exhausted in 15 or 16 years. Regardless of Objector's attempt to minimize the effect of this factor, it nevertheless appears that when the coal reserves of the Pennsylvania Coal Company are exhausted, the value of the Erie Wyoming Valley Railroad will be considerably less than at present, and the traffic value of that line to the Debtor will be substantially reduced, if not eliminated entirely. Accordingly, inasmuch as the new fixed interest and income bonds allotted to the Convertible Bondholders will not mature for fifty-five and seventy-five years respectively, the comparatively short life of the earnings of the Erie Wyoming Valley, as well as the short life of the Pennsylvania Coal Company, must be taken into account in valuing those stocks for the purposes of the Plan. There is no evidence, as contended by Objectors, that traffic from other "available sources" will be sufficient to compensate for the loss of revenue to the Erie Wyoming Valley as a result of the exhaustion of the coal reserves of the Pennsylvania Coal Company.
Furthermore, in considering the value of the Erie Wyoming Valley, it must be recognized, as found by the Commission, that the segregation formula does not allow for proper terminal allowances on traffic from that road (C.R. 2507). Hence the value of the Erie Wyoming Valley cannot properly be determined solely on the basis of the earnings shown by such formula. The results of the application of the formula are admittedly unduly favorable to lines such as the Erie Wyoming Valley, which have relatively light terminal expenses, as compared with the balance of the system (Comm.Tr. pp. 361, 362). This factor is not offset to any considerable extent by the fact that, according to Objectors, the formula was applied to the less profitable months from the standpoint of earnings of the Erie Wyoming Valley. For the foregoing reason, as well as for other reasons which are discussed by the supporters of the Plan (see Inst.Group Brief, dated August 23, 1940, pp. 81-83; Inst.Group Brief, dated September 3, 1940, pp. 3-11; Debtor's Brief dated September 3, 1940, pp. 19-25), the segregation earnings and the ratio-of-coverage comparisons made by the Objectors (Obj.Brief dated August 24, 1940, pp. 5-7, 12-13) cannot properly be used as a rigid yardstick in determining the value of the Erie Wyoming Valley for the purpose of allotting new securities to the Convertible Bondholders.
In contending that adequate consideration has not been given to the value of the Pennsylvania Coal Company, Objectors rely principally on evidence presented at the hearing of August 12, 1940, showing an improvement in the earnings of that company for the first six months of 1940, as compared with the earnings for the same period in 1939 (Obj. Ex. 2, Hearing August 12). This improvement was largely due, it was testified, to the so-called Anthracite Emergency Program, under which, since January of this year, a committee appointed by the Governor of Pennsylvania and including representatives of producers and the United Mine Workers of America, allocates the permissible production of the various producers each week (Tr., pp. 23, 24, 62-65, Hearing August 12). There appears to be considerable doubt, however, as to whether or not the Emergency Program will be continued, and some difference of opinion as to the effect which it, as well as other factors in the industry, may ultimately have on the ability of the independent lessees of the Pennsylvania Coal Company to operate profitably (Tr., pp. 68, 69, Hearing August 12). The fact remains, however, that an improvement in earnings for a short period in such an unstable industry does not furnish any solid basis for appraising the value of the Coal Company for the purposes of the Plan. Moreover, the evidence shows that, notwithstanding the improvement in earnings during the first six months of 1940, in view of conditions in the industry, the management will be pleased if coal operations of the Pennsylvania Coal Company are conducted without loss over a long term, which, in this instance, will be only until the company's coal reserves are exhausted (Tr., pp. 70, 71, Hearing August 12). Under the circumstances, it is my opinion that the evidence presented at the hearing of August 12 does not justify any change in the Commission's appraisal of the value of the Pennsylvania Coal Company for the purpose of allotting new securities to the Convertible Bondholders.
After considering the evidence with respect to the value of the collateral securing the Convertible Bonds, the Commission said (C.R. 2508): "It is our view that the properties of the Erie Wyoming Valley and the Pennsylvania Coal Company cannot safely support a first lien in excess of approximately $7,100,000 and that such amount should be the approximate limit of first-mortgage bonds apportionable to holders of convertible bonds, actually outstanding and pledged, or 25 per cent of their principal amount. The amount of the new second-lien mortgage that is allocable to the holders of convertible bonds on account of the above collateral and of other collateral held is not in excess of 100 per cent of the first lien, or approximately $7,100,000, a total of $14,200,000 in mortgage liens. On this basis interest at 4 per cent on first-mortgage bonds would be approximately $284,000 a year and interest on the second mortgage bonds at 4½ per cent would be approximately $319,500 a year, a total of $603,500. This allocation will amount to $250 of first-mortgage bonds and $250 of second-mortgage income bonds to the holder of each $1,000 convertible bond. The allocation of preferred stock will be $590 for each $1,000 bond."
Considering the different factors which must be taken into account in determining the value of the Erie Wyoming Valley and the Pennsylvania Coal Company, for the purposes of the Plan, it is my opinion that the Commission has given adequate recognition to the value of those companies, as well as to the value of the other stocks which are pledged as security for the Convertible Bonds, in determining the amounts of new senior securities which can fairly be allocated to such Bondholders on account of such collateral. According to the evidence, the collateral first lien interests of the Convertible Bondholders are not of sufficient value to entitle such Bondholders to priority over the General Lien Bonds.
In support of their claim for a greater allotment of new bonds, the Objectors also contend that the capital structure of the reorganized company should provide for approximately $100,000,000 principal amount of additional income bonds. I am of the opinion, however, that Objectors' arguments for additional income bonds are unsupportable.
Section 77, sub. b (4), prescribes that a plan of reorganization "shall provide for fixed charges (including fixed interest on funded debt, interest on unfunded debt, amortization of discount on funded debt, and rent for leased railroads) 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." Pursuant to the foregoing provision, the Commission has determined that "the annual fixed interest requirements for the Erie, including the Chicago Erie, should be limited at this time to approximately $5,650,000" (C.R. 2502). Thus, under the Plan, the fixed interest requirements amount to $5,628,245 (C.R. 2543). The Plan, therefore, provides for a total capitalization of $332,692,250, of which $138,289,887, or over 41%, represents fixed interest debt, and $191,277,279, or over 57%, represents total debt (C.R. 2543). Although it is the function of the court, as well as the Commission to approve a sound capital structure, the determination of a proper amount of fixed interest bonds, as well as the determination of the relationship between the total capitalization and both the fixed interest debt and the total debt are matters affecting the public interest and therefore come within the primary, if not the exclusive, jurisdiction of the Commission under Section 77, sub. d. While there is no fixed standard for a proper ratio between total debt and total capitalization, it may be said that the Plan provides for a capital structure in which the amount of the total debt represents a reasonable proportion of the amount of total capitalization.
Because of the junior lien position of the Convertible Bonds, the requirements of a "fair" Plan preclude any increase in the allotment of fixed interest or income bonds to the Convertible Bondholders without also providing for an increase in the amounts of fixed interest and income securities to be distributed to other interests which are entitled to receive such new securities. It is apparent from the ratio which the amount of the total debt under the Plan now bears to the amount of total capitalization, that any increase in either fixed interest debt or the total debt, in order to be sufficient to permit a greater allocation of bonds to the Convertible Bondholders, would produce an unbalanced and unsound capital structure and would be opposed to the public interest, as well as to the private interests of the security holders.
In view of the necessity of keeping the amounts of new securities within the limit of the permissible total capitalization and at the same time to provide for a sound and well balanced capital structure, the total amounts of fixed interest and income bonds to be issued under the Plan should not be increased. It follows, therefore, that any increase in the allotment of new fixed interest or income bonds to the Convertible Bondholders would necessarily have to be made at the expense of other security holders to whom such bonds are to be distributed. It is not suggested by the Objectors, however, and, in fact, there is no reasonable basis for contending, that the Plan discriminates unfairly in favor of the other interests which are entitled to receive new fixed interest or income bonds. Consequently, there can be no justification for taking fixed interest or income bonds from some other group of creditors in order to increase the allotment of such securities to the Convertible Bondholders.
Considering the fact that adequate recognition has been given to the value of the first lien interests of the Convertible Bondholders in determining a proper amount of new senior securities allocable to such Bondholders on account of their collateral, and considering that such bonds are predominantly a junion lien on the Erie system, and also giving consideration to the fact that it is not feasible to increase the total amounts of either the fixed interest or the income bonds to be issued under the Plan, I am satisfied that the relative treatment of the Convertible Bondholders within the approved capital structure is in all respects "fair and equitable." Consequently, such Bondholders have no reasonable cause to complain because they are not allotted greater amounts of either fixed interest or income bonds.
The Objectors' contentions that the Plan discriminates unfairly in favor of present Erie stockholders, and that the Commission's report fails to contain findings of the "basic and essential facts" necesary to support its determination of total capitalization, present questions similar to those considered in connection with the Perry Committee's objections and require no further comment.
In view of the fact that the value of the stock of the Pennsylvania Coal Company has been given adequate recognition in fixing the amount of new senior securities allocable to the Convertible Bondholders, there is no merit to the Objectors' contention that the stock of that company should be distributed among the holders of Convertible Bonds. The control of the Pennsylvania Coal Company by the Erie has a considerable effect on the value of the Erie Wyoming Valley, as well as on the traffic value of that line to the Erie, due to the fact that a large share of the anthracite coal traffic of the Erie Wyoming Valley consists of coal from the mines of Pennsylvania Coal Company. Hence, if Objectors' suggestion were to be followed, the distribution of such stock would have to be taken into account in determining the amounts of new senior securities allocable to the Convertible Bondholders on account of their collateral, or else the Plan would be subject to the objection that it discriminates unfairly in favor of such Bondholders.
Objections of Anna Petkewicz, Administratrix.
This Objector is administratrix of the estate of Ignac Petkewicz, deceased, who was killed October 3, 1936, by an Erie train, at a highway crossing in or near the City of Orange, New Jersey. The decedent was not an employee of the Erie Railroad Company.
An agreement to settle the Objector's death claim for $4,000 was entered into with the debtor on January 10, 1938, eight days before the filing of the Debtor's petition for reorganization under Section 77, but because of ordinary delays the money was not paid and the claim, therefore, was not satisfied prior to the entry of Order No. 1 approving the filing of said petition for reorganization.
The Objector asserts a claim to priority or preferential payment, but if her claim to a preference is denied, she objects to the Plan of Reorganization on the ground that it is unfair and inequitable to general creditors because, without providing for the payment in full of the claims of such creditors, it allots new common stock to present Erie stockholders.
It is necessary, first, to consider the question of priority, for if this claim is entitled to preferential payment the Objector has no standing to object to the plan, since under it preferred claims are to paid in cash or assumed by the reorganized company (C.R. 2817), and therefore preferred creditors are not adversely and materially affected by the Plan (Sec. 77, sub. e; C.R. 2813).
The Petkewicz claim has been allowed heretofore as a general unsecured claim by Order No. 242 (C.R. 2895), and has been classified as such for voting purposes by Order No. 244 (C.R. 2921). Although the proper procedure would have been to raise the question of its status by motion to modify those orders, there can be no objection under the circumstances to considering the question of priority in connection with the claimant's objections to the Plan.
A. Objector's Right to Preferential Payment.
The Objector maintains that her claim is entitled to preferential payment by virtue of the provisions of Sections 9079 to 9091 of the Ohio General Code. This contention apparently is based on the assumption that the Ohio statutes create a lien upon, or other property interest in, the Debtor's property in favor of the payment of this creditor, or are otherwise applicable to the present situation.
The rule obtains in equity receivership and ordinary bankruptcy proceedings that the court takes charge of the assets of the bankrupt or receivership estate subject to valid existing liens and property interests, whether the same are created by contract or agreement or by applicable state law. Marshall v. New York, 254 U.S. 380, 41 S.Ct. 143, 65 L.Ed. 315; Kennison v. Kanzler, 6 Cir., 1925, 4 F.2d 315; In re Unit Lock Co., D.C.Okla. 1931, 49 F.2d 313; Chandler Act, Sec. 67, sub. b, 11 U.S.C.A. § 107, sub. b. Thus, liens or other property interests created by state statute are recognized and enforced in such proceedings. In re Laird, 6 Cir., 1901, 109 F. 550; In re Bennett, 6 Cir., 1907, 153 F. 673; Schmidtman v. Atlantic Phosphate Oil Corp., 2 Cir., 1916, 230 F. 769; Chandler Act, Sec. 67, sub. b.
The above rule also obtains in a proceeding for the reorganization of a railroad under Section 77, subject, however, to the power of the reorganization court to order suspension of the right of a creditor to enforce its lien or property interest until after final decree. Sec. 77, sub. j, 11 U.S.C.A. § 205, sub. j; Continental Illinois National Bank Trust Co. v. Chicago, R.I. Pac. R. Co., 294 U.S. 648, 676, 55 S.Ct. 595, 79 L.Ed. 1110. Accordingly, where a state statute expressly grants a lien upon the property of a railroad in reorganization under Section 77, it has been held that such lien will be recognized and enforced in the reorganization proceeding. Thompson v. Glover, 8 Cir., 1938, 94 F.2d 544; Thompson v. Evans, 8 Cir., July 22, 1940, 113 F.2d 794.
The question here, however, is whether a lien or other property interest has been created by the statutes of Ohio in favor of the payment of this claim.
Sections 9079 to 9082 inclusive of the Ohio General Code prescribe the procedure for the reorganization of railroads in foreclosure proceedings, and include provisions for the transfer and conveyance of the properties and franchises of the original company to the company as reorganized pursuant to those statutes. Section 9083 specifies the powers vested in the reorganized company, including, among other things, the power to use bonds, which it is authorized to issue, in making adjustments or exchanges with any bondholder or stockholder of the original company, and to secure the payment of such bonds by mortgages or deeds of trust covering its railroad and other property.
Section 9085 provides that the lien of the mortgages and deeds of trust authorized by Section 9083 "shall be postponed to the lien of judgments recovered against the company, after its reorganization for * * * damages, losses, or injuries thereafter suffered or sustained by the misconduct of its agents * * *" (emphasis added). Section 9086 provides: "In an action against a railroad company, domestic or foreign, operating a railroad in this state, when it is or was for the purpose of recovering judgment against the corporation for labor done for, or supplies furnished to it, or for damages or losses, or injuries suffered or sustained by the misconduct of its agents, or the suit is founded on the company's contract or liability as a common carrier; if, when reduced to judgment by virtue of statute or the principles of equity, it would become a lien upon the property of such company, prior to the lien of a mortgage or deed of trust, legally made under the laws of this state, such judgments shall be a prior lien upon such property, notwithstanding its sale or conveyance by virtue of a judgment or decree of foreclosure for breach of the terms and conditions of such mortgage or deed of trust." Sections 9087 to 9089 inclusive prescribe the manner and method of preserving and enforcing the rights conferred by Section 9086. Section 9090 provides in part: "A foreign corporation possessing a railroad which is partly in another state and partly within this state, may here exercise and enjoy all its powers, privileges, faculties, and franchises, for the purposes of such road and its business, not inconsistent with the laws of this state. Mortgages and deeds of trust made by such corporation upon its railroad, equipments, or other property within this state, shall operate in the manner and with like effect as provided with respect to companies so reorganized."
In King v. Thompson, 6 Cir., 1901, 110 F. 319, cited by Objector, it was held in a foreclosure proceeding involving a railroad located partly within this state that certain judgments for personal injuries recovered against the railroad company were prior liens upon the property of such company by virtue of the provisions of Revised Statutes 3398 and 3399 (now Sections 9085 and 9090, O.G.C.). Accordingly, it was held in that case that such judgments were entitled to be paid out of the proceeds of the sale of the property in preference to the mortgages executed by the railroad company.
The facts of the King case, however, are quite different from the facts here. In that case the priority claimants had recovered judgments against the railroad company and such judgments constituted liens upon the property of the company within the State of Ohio. The question in that case, therefore, was whether the judgment liens were entitled to priority over the mortgage liens under the statutes referred to. Here, however, the priority claimant merely has a liquidated claim for damages for the death of the decedent. She has no judgment against the Debtor, and no lien of any kind upon the Debtor's property, or right to priority over existing mortgages, unless a lien or right to priority is created in her favor by the statutes referred to.
With respect to the Ohio statutes, it is to be observed that the effect of Section 9085 is only to give priority over certain mortgages to the liens of judgments recovered against a railroad. The effect of Section 9086 and the next three succeeding sections is merely to provide a means of protecting certain creditors, whose claims " when reduced to judgment" " would become a lien" upon the property of the railroad " prior to the lien of a mortgage", from the possibility of having their rights to acquire such liens defeated by the sale or conveyance of the railroad's property under judgment or decree of foreclosure, before such creditors have obtained judgment. By Section 9088 the court is authorized to retain out of the proceeds of the foreclosure sale an amount sufficient to satisfy any judgment which may be recovered in the action referred to in Section 9086, providing the provisions of Section 9087 have been complied with by the claimant. Thus, the Ohio statutes confer priority on liens of judgments recovered against a railroad, but not on claims for damages which are not reduced to judgment.
Apart from any question with respect to the applicability of the foregoing statutes to this proceeding, it is my opinion that this claim is not entitled to priority or preferential payment by virtue of such statutes, because the statutes fail expressly, or by implication, to create any lien or other property interest in favor of the payment of a claim for damages, and also fail to provide that such a claim is entitled to priority over the liens of railroad mortgages, if not reduced to judgment.
Moreover, the facts disclose that Objector's claim against the Debtor arose from the operation of a train in New Jersey, and that no action was commenced on said claim in this state for the purpose of recovering judgment against the Debtor. Even assuming, therefore, that the Ohio statutes are applicable to this proceeding and that they confer a right to priority on claims not reduced to judgment, it is clear that such statutes do not govern the priority of claims which arose outside of the state, where no action against the railroad company is pending in this state as provided in Section 9086. Under the circumstances, if this claim is to be given priority in this proceeding by virtue of the provisions of a state statute, such right must be conferred, not by the statutes of Ohio, but by the statutes of New Jersey, the state in which the injury occurred and the cause of action arose. Thompson v. Evans, 8 Cir., July 22, 1940, 113 F.2d 794.
That this claim is a meritorious one cannot be denied. But the fact that the claim was liquidated by agreement a few days prior to the commencement of the reorganization proceeding and is admitted by the Trustees is not a sufficient reason to give it priority over the liens of existing mortgages, if it is not otherwise entitled to priority in this proceeding. Courts of equity have no general authority to displace vested contract liens, it being the exception and not the rule that such liens can be displaced. Kneeland v. American Loan Trust Co., 136 U.S. 89, 97, 98, 10 S.Ct. 950, 34 L.Ed. 379.
With the exception of claims expressly given priority by Section 77 (as, for example, the so-called "six months" claims for materials, labor, supplies, etc.; and claims of employees for personal injury and claims payable by sureties, etc.; as specified in subdivision n), the reorganization court, in a proceeding under Section 77, will not recognize or enforce priorities (1) unless there is something in the intrinsic nature of a claim which confers upon it an equity superior to that of the claims of creditors over whom a preference is asserted (Van Raalte v. Enterprise Transportation Co., 1 Cir., 1909, 169 F. 606; Berthold-Jennings Lumber Co. v. St. Louis, I.M. S. Railway Co., 8 Cir., 1935, 80 F.2d 32, 102 A.L.R. 688) or (2) unless a lien or other property interest in favor of the payment of such claim has been created by agreement or by applicable state law. Thompson v. Glover, 8 Cir., 1938, 94 F.2d 544; Thompson v. Evans, supra; Schmidtman v. Atlantic Phosphate Oil Corp., 2 Cir., 1916, 230 F. 769. The liquidation of this claim by agreement has neither conferred upon it a superior equity, nor given it a lien upon, or other property interest in, the Debtor's property, which entitles it to priority in this proceeding.
In view of the fact that this claim is not one which is expressly given priority by Section 77, and is not entitled to priority over existing mortgages by the statutes of Ohio, or by any established principle of law or equity, it is my conclusion that the claim is merely a meritorious general claim against the Debtor's estate, without any right to priority or preferential payment.
The Objector has cited the case of Mercantile Trust Co. v. Tennessee Central Railway Co., D.C.M.D.Tenn. 1922, 286 F. 425, 426, in which the District Court, following a decision of a state court, allowed certain claims for personal injury priority over existing mortgages, under a statute of the State of Tennessee, notwithstanding the fact that such claims had not been reduced to judgment, but had merely been liquidated by settlement agreements. The Tennessee statute provided "that no railroad company shall have power * * * to create any mortgage or other kind of lien on its railway property in this state, which shall be valid and binding against judgments * * * or for damages done to persons and property in the operation of its railroad in this state."
Although the opinion in the Mercantile Trust case fails to indicate where the claims arose, it must be assumed, in view of the language of the statute, that the claims which were given priority by virtue of such statute arose from the operation of the railroad in Tennessee. The decision in that case does not establish that priority would be allowed to a claim for damages under the Tennessee statute if such claim arose outside of that state, and was not reduced to judgment. But aside from that fact, the ruling in the Mercantile Trust case, not being controlling authority, cannot, in my opinion, be followed in this proceeding, in view of the established principles relating to the priority of claims.
B. The Objections to the Plan.
The issues presented by the objections of this unsecured creditor are similar to the questions raised by the objections of the Perry Committee and require only brief comment.
The Objector contends that the Plan is unfair and inequitable to general creditors because it allots new common stock to present Erie stockholders without providing that claims of unsecured creditors be "paid in full." The Objector apparently assumes that unsecured creditors should be paid in full in cash before stockholders are entitled to participate in the reorganized company, for she says (Objections, p. 3): "Stockholders should not receive anything from the company assets without the creditors first being paid in full." Citing Case v. Los Angeles Lbr. Prod. Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110. In this case, as hereinbefore noted in connection with the Perry Committee's objections, the value of the properties of the Erie and the Chicago Erie is sufficient "to satisfy all * * * claims prior to stock and allow some equity for preferred and common stock of the Erie." Consequently, the provisions in the Plan permitting present stockholders to participate "within the limits of the equity remaining for stockholders after satisfying senior claims" are not in conflict with the decision in the Los Angeles Lumber Products Company case. In the Los Angeles case, the Plan was rejected by the Supreme Court because it provided for the participation of old stockholders, notwithstanding a finding that the equity of such stockholders was without value.
Under the present Plan, unsecured creditors are allotted one share of new common stock for each $40.00 in amount of their claims. As the amount of unsecured claims, including lease liabilities, is estimated at $5,000,000, that provision will result in the distribution of an estimated total of 125,000 shares of new common stock to such creditors. Present stockholders, whose equity has been established at $22,439,031, are allotted 429,736.2 shares of new common stock in recognition of the value of such equity. Thus, while each share of the new common stock allotted to general creditors represents $40 of their claims, one share of the same stock allotted to the present stockholders represents approximately $52.22 of the total value of their equity, and represents $500 of the par value of their old stock.
As hereinbefore noted, "fair and equitable" treatment of creditors within the doctrine of the Boyd case does not require that creditors receive cash as a condition to stockholders retaining an interest in the reorganized company, but permits the interest of creditors to be preserved by the issuance, on equitable terms, of new securities. It also has been noted that "circumstances may justify an offer of different amounts of the same grade of securities to both creditors and stockholders." Kansas City Terminal Railway Co. v. Central Union Trust Co., 271 U.S. 445, 456, 46 S.Ct. 549, 552, 70 L.Ed. 1028. The present case clearly justifies the adoption of the principle of a quantitative preference with respect to the treatment of certain different classes of existing securityholders and claimants because of the necessity of limiting the number of different classes of new securities in the interest of providing a sound and simplified capital structure.
The provisions in the Plan for unsecured creditors adequately recognizes their right to priority over present stockholders. Under the circumstances existing in this case, the treatment of unsecured creditors is in accordance with established principles, and meets the statutory and judicial standards of fairness.
Objections of Commercial Trust Company of New Jersey, Trustee.
This Objector is Trustee under the mortgage of the New York, Lake Erie Western Docks and Improvement Company (hereinafter called the "Docks Company"). There are issued and outstanding under said mortgage $4,000,000 of bonds, of which $3,396,000 are in the hands of the public. The interest on the publicly held bonds has been paid to date (Order No. 195, C.R. 2061). The Docks Company is a subsidiary of the Debtor, owning certain terminal facilities and other properties at Weehawken, New Jersey, which it leases to the Debtor. The Debtor's interest in the lease, and all of the stock of the Docks Company, as well as $604,000 of its bonds owned by the Debtor, are pledged under the Debtor's First Consolidated Mortgage.
Under Article O of the Plan (C.R. 2840-42) the Reorganization Managers, as representatives of the Erie estate or the reorganized company, are given authority to cause the reorganized company to acquire all or any part of the property of any of the subsidiaries of the Debtor by merger, consolidation, or otherwise, if all of the stock or substantially all of the securities of such subsidiary are now owned by the Debtor or any subsidiary of the Debtor; and subject to a certain proviso, the Reorganization Managers are also given authority to cause one or more new subsidiaries to be organized to acquire any part or parts of the property of the Debtor, or all or part of the property of any existing subsidiary. Article O further provides that the Reorganization Managers shall have power, subject to the approval of the Commission and the court, to the extent that either or both shall have jurisdiction, and subject also to certain other conditions and provisos specified in the Article, to make new leases to be binding on the reorganized company; to acquire for the reorganized company all or any part of the properties or any of the securities of any lessor and in that connection to authorize the issuance of new securities of the reorganized company either (a) for sale in order to finance any such acquisition, or (b) for delivery to any such lessor or to any of the owners of any such securities in exchange for any such properties or securities; and to compromise or settle any claim of any lessor or of any of the holders of securities of any lessor.
The Mortgage Trustee has taken the position that the Plan should provide that the bonds of the Docks Company be left undisturbed. It also objects to the powers which are vested in the Reorganization Managers by the provisions of Article O, if the exercise of any of those powers would in any way disturb or affect the lien of the Docks Company mortgage, or the security of the bonds issued thereunder. It likewise objects to the power given to such Reorganization Managers to make a new lease of all or any part of the property covered by the Docks Company mortgage, unless the new lease provides for a net rental of an amount not less than that provided for in the existing lease.
The objections of the Mortgage Trustee to the powers vested in the Reorganization Managers by the provisions of Article O of the Plan apparently are based on the belief that the Reorganization Managers would have the authority, by exercising those powers, to bind the holders of the Docks Company bonds contrary to their consent and approval. It clearly appears, however, from the language of Article O, that whatever authority is vested in the Reorganization Managers by the provisions of that Article is vested in them only as the representatives of the Erie estate or of the reorganized company. The Reorganization Managers have no power by virtue of anything contained in Article O to bind any lessor, or any holder of any securities of any lessor, contrary to their consent and approval.
Thus, in speaking of any new lease or leases, the Plan provides that: "The Reorganization Managers shall have the power to make a new lease or leases to be binding upon the reorganized company * *" (C.R. 2841), and in speaking of possible acquisitions of the properties or securities of any lessor, the Plan says: "The Reorganization Managers shall have the power to acquire for the reorganized company all or any part of the properties or any of the securities of any lessor * * *" (C.R. 2841).
The Reorganization Managers have no authority under the provisions of Article O, or under any other provision in the Plan, to reject or disaffirm leases. That may be done only by the Debtor Trustees by order of the court, or in the Plan of Reorganization, as provided by Section 77. However, if a lease is rejected in accordance with the provisions of the statute, the Reorganization Managers will have power to represent the Erie estate and the reorganized company in making a new lease, or in making other arrangements with respect to the property or securities of the lessor. Although the Plan provides that a lease could be made "at a rental to be agreed upon between the Managers and the lessor" (C.R. 2841), nevertheless, in the case of the Docks Company, any modification of the existing rental would have to be agreed upon not only by the Reorganization Managers and the lessor, but also by the holders of the Docks Company's bonds because the lessor's interest in the lease is pledged to secure the Docks Company mortgage.
By the same token, there is nothing in the Plan which undertakes to bind the holders of the Docks Company's bonds to surrender their bonds or their vested lien on the Docks Company property. Thus, any offer made by the Reorganization Managers to acquire any or all of the property of the Docks Company by an exchange of the new securities of the reorganized company for the bonds of the Docks Company or otherwise, which would result in disturbing the lien of the Docks Company mortgage, would not be binding on the holders of the Docks Company's bonds without their consent. Of course, if the Docks Company becomes involved in a receivership or reorganization proceeding, the lien of the bondholders may be disturbed without their consent, but that would not be due to the provisions of Article O of this Plan. Accordingly, the fears of the Mortgage Trustee that the Reorganization Managers are authorized to act with respect to the matters and things set forth in Article O without regard to the rights of the holders of the Docks Company's bonds are not well founded.
Although the Plan does not provide that the Docks Company's bonds are to be left undisturbed, there is nothing contained in such Plan which prejudices the claim of the Mortgage Trustee that such bonds should remain undisturbed, or which compels an exchange of securities binding on the Docks Company's bondholders. Consequently, it is unnecessary for the purposes of the Plan to determine whether or not the bonds of the Docks Company should be left undisturbed.
In view of the foregoing, neither the Mortgage Trustee nor the holders of the bonds of the Docks Company have any valid ground for objecting to the Plan.
Other Objections.
Letters in the nature of objections to the Plan were received by the Clerk from William F. Wissman, a Refunding Bondholder, Charles D. Penniston, a Convertible Bondholder, and Joel E. Fisher, a holder of New York, Lake Erie Western Docks and Improvement Company bonds.
The objections of Wissman and Penniston to the treatment accorded by the Plan to the Refunding Bondholders and the Convertible Bondholders present questions which have been fully considered in connection with the objections of the Perry Committee and the Convertible Committee and, therefore, require no further comment. The contentions and conclusions of these Objectors are entirely unsupportable. It should be pointed out, however, that the objections of Charles D. Penniston, according to his letter of July 18, 1940, are based on a circular letter from the Convertible Committee dated August 31, 1939, which relates to the Plan proposed by the Commission's Examiner rather than to the Plan subsequently approved by the Commission and certified to this court.
The objection of Joel E. Fisher was filed under the misapprehension that the Plan allots new 4% bonds to the holders of the Docks Company's 5% bonds. The Plan contains no such provision, nor does it recommend or provide that the Docks Company's bonds be disturbed.
The Request of the Chase National Bank.
At the hearing of August 12, counsel for the Chase National Bank, Trustee under the New York Erie Third Mortgage, although not objecting to the Plan of Reorganization, requested that the Master's report on the objections to the Plan include a recommendation (1) that the issues with respect to the rate of interest to be paid on the bonds outstanding under the New York Erie Third Mortgage be determined by the court before it makes a ruling on the Plan, or (2) in the event the Plan is approved, that the order approving said Plan contain a provision to the effect that the Plan shall not be consummated until those issues have been determined (Tr., pp. 9-11, Hearing August 12).
The matter referred to is now pending before the court on exceptions of the Mortgage Trustee to a report of the Special Master dated June 20, 1939. There is no need to have the questions raised by said exceptions decided by the court either before, or at the time, it makes its ruling on the Plan. Certainly, there is no need to have any order approving the Plan contain a provision of the kind suggested by the Mortgage Trustee.
The question of the rate of interest payable on the bonds issued under the New York Erie Third Mortgage has no effect whatsoever on the determination of the fairness of the Plan or whether it should, or should not, be approved. The Plan specifically provides in Article E (C.R. 2818) that holders of New York Erie Third Mortgage Bonds shall be allowed interest on their claims at the coupon rate, or at such other rates as the court finds to be equitable. The principal amount of the claim of such bondholders has been determined, and allowed by the court (Order No. 244, C.R. 2921). Bondholders who do not accept interest at the coupon rate (Order No. 233, C.R. 2761) will, if they are successful in establishing claims to interest at a higher rate, be entitled to receive interest at the higher rate under the Plan, and, since the court cannot surrender control of the estate without making provision for such claims if they have been established or remain undetermined (Sec. 77, sub. f), there is no need to provide now for any restriction on the consummation of the Plan.
The Institutional Group's Request for Findings.
In its brief of August 3, 1940 (p. 117), the Institutional Group requests the court to make findings in the language of the statute that the Plan meets all of the requirements of Section 77.
Although only the questions raised by the several objections to the Plan are before me for consideration, it may be helpful to the court to state, that from a consideration of the Plan as a whole, in light of the record, I am satisfied that it complies with the provisions of subdivision b of Section 77, 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, conforms to the requirements of the law of the land regarding the participation of the various classes of creditors and stockholders, and provides for the payment of all costs of administration and other allowances made or to be made by the judge.
One of the points specified in subdivision e of Section 77 on which the judge must be satisfied is that: "(2) The approximate amounts to be paid by the debtor, or by any corporation or corporations acquiring the debtor's assets, for expenses and fees incident to the reorganization, have been fully disclosed so far as they can be ascertained at the date of such hearing, are reasonable, are within such maximum limits as are fixed by the Commission, and are within such maximum limits to be subject to the approval of the judge."
By Order No. 236 (C.R. 2851) all petitions for allowances from the estates of the Debtors, Erie Railroad Company and the Nypano Railroad Company, were referred to me "for the purpose of taking any testimony that may be offered in connection therewith." Under date of August 9, 1940, the Commission issued its report and order fixing the maximum limits of allowances (covering expenses and fees to June 24, 1940) to such parties as had filed petitions therefor pursuant to Order No. 222 (C.R. 2657) as corrected. (C.R. 2683).
Pursuant to Order No. 236, a hearing on said petitions for allowances was held before me on August 27, 1940, at which time it appeared that several of the parties had filed, or were about to file, with the Commission, petitions or applications for reconsideration of the allowances fixed by the Commission in its report and order of August 9. Consequently, said hearing was continued to September 17, 1940. On the date of the continued hearing, it appeared that several petitions for reconsideration had been filed with the Commission. Hence, further hearings on the petitions for allowances were continued without day, pending the disposition of such petitions by the Commission.
From the foregoing, it is apparent that no final determination of the matter of allowances can be made by the court at this time. It is suggested, however, by the Institutional Group that the court's ruling on the Plan, and on the objections to the Plan, need not await final determination of the question of allowances because, under the statute, such allowances are subject to the approval of the court and therefore are bound to be reasonable in the opinion of the court, and are also required to be within the maximum limits as fixed by the Commission. Thus, it is maintained that the court can properly make the findings required by Section 77, sub. e (2), notwithstanding that no final determination of allowances can be made at the present time.
While I express no opinion on the matter of allowances, I see no objection to there being a ruling by the court on the Plan prior to the determination of such allowances. A precedent for such procedure will be found in the A.C. Y. Railway Reorganization, No. 28282 on the docket of this court.
For opinion of Circuit Court of Appeals, see 117 F.2d 966.
Recommendations.
From a consideration of the record in this proceeding and in view of the findings and conclusions herein set forth, it is recommended:1. That the claim of Anna Petkewicz to priority or preferential payment be disallowed.
2. That the objections to the Plan filed by the Protective Committee for the Refunding and Improvement Mortgage Bonds, Miners Savings Bank of Pittston and the Protective Committee for the General Mortgage Convertible Bonds, Anna Petkewicz, Administratrix, the Commercial Trust Company of New Jersey as Trustee under the Mortgage of the New York, Lake Erie Western Docks and Improvement Company, William F. Wissman, Charles D. Penniston and Joel E. Fisher, be overruled, and
3. That the Plan of Reorganization as set forth in the report and order of the Interstate Commerce Commission dated April 6, 1940, as modified by the Commission's report and order dated July 8, 1940, in Finance Docket No. 11915, be approved.
This cause came on for hearing on the Proposed Plan of Reorganization and the Report of the Special Master (October 19, 1940) regarding objections to the Plan of Reorganization.
For the reasons set forth in such report of the special master, the court overrules the objections and exceptions and confirms and approves the master's report.
On consideration of the plan, the court finds that it complies with the law and is fair and equitable; that the approximate amounts to be paid for expenses and fees incident to the reorganization have been fully disclosed so far as they could at the time be ascertained and, within limits fixed by the Commission, are reasonable.
The court is therefore of opinion that the Plan of Reorganization of the Erie Railroad Company and the Nypano Railroad Company should be approved.