Brooks v. St. Louis-San Francisco Ry. Co.

• Citation: 153 F.2d 312
• Decision Date: 06 March 1946
• Docket Number: No. 13105-13107.,13105-13107.
• Parties: BROOKS v. ST. LOUIS-SAN FRANCISCO RY. CO. et al. DIKIS et al. v. SAME. ST. LOUIS-SAN FRANCISCO RY. CO. v. PRIOR LIEN BONDHOLDERS' COMMITTEE et al.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

153 F.2d 312 (1946)

BROOKS v. ST. LOUIS-SAN FRANCISCO RY. CO. et al. DIKIS et al. v. SAME. ST. LOUIS-SAN FRANCISCO RY. CO. v. PRIOR LIEN BONDHOLDERS' COMMITTEE et al.

Nos. 13105-13107.

Circuit Court of Appeals, Eighth Circuit.

February 8, 1946.

Rehearing Denied March 6, 1946.

William V. Hodges, of Denver, Colo. (Daniel Bartlett, of St. Louis, Mo., and Hodges, Vidal & Goree and Walter M. Simon, all of Denver, Colo., on the brief), for appellant St. Louis-San Francisco Ry. Co., Debtor.

Chelsea O. Inman, of St. Louis, Mo. (Phil W. Davis, Jr. and W. N. Maben, both of Tulsa, Okl., on the brief), for appellants Lola Brooks, Adm'x of Estate of F. S. Brooks, deceased, and John E. Dikis, Adm'r of Estate of Robert E. Lee, deceased, and others.

George D. Gibson, of Richmond, Va. (Lowenhaupt, Waite, Chasnoff & Stolar and Jacob Chasnoff, all of St. Louis, Mo., and Hunton Williams, Anderson, Gay & Moore and Henry W. Anderson, all of Richmond, Va., on the brief), for appellee Prior Lien Bondholders' Committee.

Leonard D. Adkins, of New York City (Carter, Bull & Garstang and Emmet T. Carter, all of St. Louis, Mo., and Cravath, Swaine & Moore and Robert T. Swaine, all of New York City, on the brief), for appellee Consolidated Bondholders' Committee.

Edwin S. S. Sunderland, of New York City (Charles P. Williams, of St. Louis, Mo., and Davis, Polk, Wardwell, Sunderland & Kiendl, Thomas O'G. FitzGibbon, and James L. Homire, all of New York City, on the brief), for appellee Fort Scott Bondholders' Committee.

Bryan, Cave, McPheeters & McRoberts and Thomas S. McPheeters, all of St. Louis, Mo., and White & Case and Fitzhugh McGrew, all of New York City, for appellee Bankers Trust Co., Trustee, Kansas City, Fort Scott and Memphis R. Co. Refunding Mortgage.

Fordyce, White, Mayne, Williams & Hartman and Thomas W. White, all of St. Louis, Mo., and Rathbone, Perry, Kelley & Drye and Alexander M. Lewis, all of New York City, for appellee Central Hanover Bank & Trust Co., Trustee, St. Louis-San Francisco R. Co. Prior Lien Mortgage.

Nagel, Kirby, Orrick & Shepley, Ethan A. H. Shepley, and William G. Pettus, Jr., all of St. Louis, Mo., and Milbank, Tweed

& Hope and Orville W. Wood, all of New York City, for appellees Chase Nat. Bank of City of New York and John A. Aid, Trustees, St. Louis-San Francisco R. Co. Consolidated Mortgage.

Before GARDNER, THOMAS and RIDDICK, Circuit Judges.

GARDNER, Circuit Judge.

There are here three appeals, Nos. 13,105, 13,106 and 13,107, all from an order of the District Court approving a plan of reorganization for the St. Louis-San Francisco Railway Company. As these appeals raise substantially the same questions and were consolidated for purpose of presentation, they will be considered together. The plan of reorganization reduced the capitalization of the Railway Company from about $480,000,000 to about $247,000,000. The capitalization as so reduced is less than the secured bonded indebtedness of the Railway Company by over $110,000,000. The plan provides for the issuance of new securities to go to the holders of the bonds. The allocation and apportionment of these securities consisting of first mortgage bonds, second mortgage bonds and stock, among the secured creditors is not here material because all the holders of the old bonds have accepted the new plan. The old bonds were all secured by various mortgage liens on the property of the Railway Company. Under the plan there is nothing apportioned to the unsecured creditors nor to the stockholders.

The appellants are the Railway Company, representing its stockholders and unsecured creditors, and Lola Brooks, Administratrix, and John E. Dikis, Administrator, who are the owners of claims allowed in the proceedings in the bankruptcy court based upon judgments against the Railway Company on account of damages for personal injuries and death resulting from the negligence of the Railway Company prior to the period of receivership and reorganization proceedings.

The debtor's predecessor in interest was incorporated in 1876 and went into reorganization in 1896. It was again reorganized in 1916 at which time the debtor was organized to take over the properties. The capital structure of the debtor was a matter of adverse criticism by the Interstate Commerce Commission as early as 1923. By 1932 its credit became exhausted, its taxes became delinquent and its financial stability precarious. On its application for a Reconstruction Finance Corporation loan in 1932, the Commission held that it was over-capitalized, and as a condition to authorization of a Reconstruction Finance Corporation loan the Commission required the debtor to agree to submit a plan for reduction of fixed charges. Such a plan was proposed but did not become effective and receivers were appointed November 1, 1932. On May 16, 1933, the debtor filed its petition under Section 77 of the Bankruptcy Act, 11 U.S.C.A. § 205. The 1932 plan was ultimately held inadequate to meet debtor's needs and thereafter a new plan was proposed by three bondholders' committees. This plan, after wide investigation and careful consideration by the Commission, was submitted to the Court for its approval and it is from the order entered April 10, 1945, approving that plan that these appeals are prosecuted.

The substantial objection to the plan is that the new capitalization is too low and that it should have been fixed at an amount high enough to have satisfied all secured claims and leave some equity to be allocated to the stockholders and unsecured creditors.

In the original brief filed on behalf of the Railway Company, its stockholders and unsecured creditors, the questions at issue are stated substantially as follows: (1) The Interstate Commerce Commission proceeded on the assumption that the rights and interests of the unsecured creditors and the debtor in debtor's assets were and are without value, such an assumption or finding being unfair, inequitable, arbitrary and without support in the evidence; (2) that the burden of debt of the debtor as found or assumed by the Commission was determined by the trial court without correction and without any allocation of the proceeds derived from the operation of the property during reorganization, and such burden is grossly more than warranted by the evidence or the applicable law; (3) that if the earnings during reorganization period be properly applied and the debtor's earning power properly considered, there is no reasonable basis for a finding that claims of unsecured creditors and the interest of the debtor are without value.

In support of these contentions it is argued (1) that it was beyond the power of the Commission to fix the total new capitalization at an amount less than the total claims of bondholders, and (2) that the total claims of the bondholders must be computed without regard to the interest that has accumulated on their principal during the long course of reorganization proceedings. In considering these issues we must have in mind the province of the court as distinguished from the province of the Interstate Commerce Commission, as that question has been determined by controlling decisions.

Ordinarily, the underlying necessity for the reorganization of a railroad company is that it can not support its existing capitalization. Under the equity practice there was no authority vested in the court to change or recapitalize an overburdened railroad company, nor to pare down secured debts without a sale of the security. With the adoption of Section 77 of the Bankruptcy Act, however, the Interstate Commerce Commission was given the initial power of determining the new capitalization of a reorganized railroad. The Act made it possible to eliminate the foreclosure and sale under mortgages against the railway property, and conferred upon the reorganization court the power to determine the value of conflicting claims. The Act also conferred upon the Interstate Commerce Commission the duty and power of determining the new capitalization. In the determination of this important question it is necessary to ascertain the prospective earning power of the Railway Company considered as a going concern. While jurisdiction of the property of the Railway Company and its management, maintenance and operation during the process of reorganization is vested in the court, certain matters were left to the determination of the Interstate Commerce Commission, and its determination of those questions if sustained by substantial evidence and not violative of legal standards, is conclusive on the courts. Ecker et al. v. Western Pacific R. Corporation, 318 U.S. 448, 63 S. Ct. 692, 87 L.Ed. 892; Group of Investors v. Chicago, M. St. P. & P. R. Co., 318 U. S. 523, 63 S.Ct. 727, 87 L.Ed. 959.

Manifestly, if the value of the new securities does not exceed the amount of the secured claims, then neither the unsecured claims nor the stockholders can benefit by any change in the apportionment of the new securities. The general creditors and stockholders are confessedly junior in all respects to the claims of the bondholders. Louisville Trust Co. v. Louisville, N. A. & C. R. Co., 174 U.S. 674, 19 S.Ct. 827, 43 L.Ed. 1130; Northern Pac. R. Co. v. Boyd, 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931; Case et al. v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110. In the final analysis, the controlling if not the only question presented by these appeals is whether the action of the Commission in determining the capitalization of the Railway Company as represented by the new securities, approved by the trial court, should be set aside in order to bring about some allocation of the new securities to the general creditors and stockholders.

The Supreme Court, in Ecker v. Western Pacific R. Corp., supra, and Group of Investors v. Chicago, M. St. P. & P. R. Co., supra, has indicated the relative functions to be performed by the Commission and the reorganizing court. In th...