State of Texas v. Group of Institutional Investors

• Decision Date: 14 August 1951
• Docket Number: No. 14264-14274.,No. 14256,14256,14264-14274.
• Parties: STATE OF TEXAS v. GROUP OF INSTITUTIONAL INVESTORS et al. MISSOURI PAC. R. CO. et al. v. GROUP OF INSTITUTIONAL INVESTORS et al.
• Court: U.S. Court of Appeals — Eighth Circuit

191 F.2d 265 (1951)

STATE OF TEXAS v. GROUP OF INSTITUTIONAL INVESTORS et al. MISSOURI PAC. R. CO. et al. v. GROUP OF INSTITUTIONAL INVESTORS et al.

Nos. 14256, Nos. 14264-14274.

United States Court of Appeals Eighth Circuit.

August 14, 1951.

C. K. Richards, Asst. Atty. Gen., of Texas (Price Daniel, Atty. Gen. of Texas, with him on the brief), for the State of Texas, intervener.

Marion B. Pierce, New York City (Oliver & Oliver, Cape Girardeau, Mo., with him on the brief), for Missouri Pac. R. Co., debtor.

Helen Munsert, Chicago, Ill., for Protective Committee for Holders of Common Stock of Missouri Pac. R. Co.

Adrian L. Foley, New York City (Edmund O'Hare, New York City, with him on the brief), for Alleghany Corp.

Lucien Hilmer, New York City, for John V. Farwell III and others, Independent Directors of Missouri Pac. R. Co.

Carl H. McClure III, New York City, and Forest P. Tralles, St. Louis, Mo. (Carroll C. Gilpin, St. Louis, Mo., Edward B. Twombly, New York City, DeLancey C. Smith, San Francisco, Cal., Willard P. Scott, Joseph W. Keena, Tralles, Hoffmeister & Gilpin, Putney, Twombly, Hall & Skidmore, St. Louis, Mo., Oliver & Donnally, New York City, with them on the brief), for Protective Committee for Holders of Missouri Pac. R. Co. 5¼% Secured Serial Gold Bonds, etc., and others.

Emmet McCaffery, Washington, D. C. (Emmet Carter, St. Louis, Mo., Dorr, Hand & Dawson, New York City, Carter, Bull & McNulty, St. Louis, Mo., with him on the brief), for Chemical Bank & Trust Co., as trustee.

William H. Biggs, St. Louis, Mo., for Missouri Pac. R. Co. 5¼% Secured Serial Bondholders Committee.

Harry Kirshbaum, New York City (Edwin J. Bean, St. Louis, Mo., with him on the brief), for Gerald Axelrod and others.

Harry W. Harrison and Robert E. Smith, New York City, filed brief for Protective Committee for Holders of Preferred Stock of Missouri Pacific Railroad Co.

Charles W. McConaughy, New York City (Jacob Chasnoff, St. Louis, Mo., Morris D. Crawford, Jr., Cadwalader, Wickersham & Taft, New York City, Lowenhaupt, Waite, Chasnoff & Stolar, St. Louis, Mo., with him on the brief), for Group of Institutional Investors.

Sanford H. E. Freund, New York City (Shearman & Sterling & Wright, New York City, with him on the brief), for Protective Committee for Holders of General Mortgage Bonds of Missouri Pac. R. Co.

Leonard P. Moore, New York City (Clair B. Hughes, Alan S. Kuller, Chadbourne, Parke, Whiteside, Wolff & Brophy, New York City, with him on the brief), for Manufacturers Trust Co., as corporate trustee.

Kenneth McEwen, New York City (Everett Paul Griffin, St. Louis, Mo., Edward F. Colladay, Washington, D. C., with him on the brief), for Edmund Wright, and others.

Harry Kirshbaum, New York City, Edwin J. Bean, St. Louis, Mo., filed briefs for Convertible Bondholders Group, owners and holders.

William P. Palmer, Root, Ballantine, Harlan, Bushby & Palmer, New York City, filed brief for Bankers Trust Co., as successor trustee.

Before WOODROUGH, THOMAS, and JOHNSEN, Circuit Judges.

WOODROUGH, Circuit Judge.

On October 3, 1950, the District Court entered its Order No. 3571 In the Matter of Missouri Pacific Railroad Company, Debtor, in Proceedings for Reorganization of a Railroad, whereby upon hearing and consideration the court overruled all objections against and approved the system Plan of Reorganization for Missouri Pacific Railroad Company, Debtor, and its subsidiary railroads, all of which had filed petitions as debtors in the same proceedings, declaring themselves to be unable to meet their debts and desiring to effect a plan of reorganization pursuant to Section 77 of the Bankruptcy Act, 11 U.S.C.A. § 205, in connection with, or as a part of, the plan of reorganization of said Missouri Pacific Railroad Company. The system Plan of Reorganization so approved was submitted by the Interstate Commerce Commission on August 2, 1949, in its Fourth Supplemental Report, and after further hearing in its Fifth Supplemental Report and Order of December 29, 1949. The reports and the order of the Commission appear in full in Volume LII of the Missouri Pacific Reorganization proceedings. The District Court accompanied its order No. 3571, affirming and approving the system Plan of Reorganization, with its comprehensive opinion in writing, reported in 93 F.Supp. 832, in which it referred to its previous opinions concerning earlier plans of reorganization of the same railroads, reported in 39 F. Supp. 436, in 50 F.Supp. 936, and in 64 F. Supp. 64. Its opinions set forth the relations of the Missouri Pacific to its subsidiaries, the course of the reorganization proceedings and the questions, contentions and rulings.

The appellants in all these appeals are contending here that the court erred in entering its Order No. 3571 approving the Plan of Reorganization of 1949, and all seek reversal or modification of such approval. The appellants in two of the appeals, No. 14,273 and No. 14,274, respectively, also seek reversal of Orders No. 3661 and No. 3662, entered by the District Court in the same proceedings on the same date of October 3, 1950. By Order No. 3661, a petition for treatment of the subsidiary debtor New Orleans, Texas and Mexico Railway Company differing from that provided by the plan was dismissed. By Order No. 3662, the petition of persons designating themselves "Independent Directors" of the Missouri Pacific, seeking action by the court in respect to the debtors at variance with the Plan, was dismissed. The part of the opinion of the District Court on pages 856 to 862 of 93 F.Supp. is directed to its Order No. 3661, and pages 862 to the end of the opinion cover its Order No. 3662.

The Plan provides for a new system capitalization for all the debtors not to exceed approximately $612,000,000, made up by ascribing $509,700,000 permissible valuation to Missouri Pacific; $83,700,000 to New Orleans, and $57,000,000 to International-Great Northern, and cancelling out certain inter-company debts. There results an equity of some $30,000,000 for the preferred stockholders of Missouri Pacific recognized in the distribution by allowing 3 shares of proposed new Class B common stock for each 7 shares of the present preferred.

But the common stockholders of that company are eliminated. As to such common stockholders, the court specifically approved the finding of the Commission that "the equity of the holders of common stock is without value". A simplified capital structure is prescribed for the system, consisting of only three classes of indebtedness: (1) equipment obligations, (2) first mortgage bonds, and (3) general mortgage bonds. There are three classes of capital stock — preferred, no-par common stock class A and class B. The distribution is shown on the table Appendix D at page 855 of 93 F.Supp. in the District Court's opinion.

We approach review of the orders here appealed from by noting the classes of parties in interest who have prosecuted the appeals and observe at the outset that, although the Plan that has been approved and is for review here includes provisions affecting the securities of numerous classes of creditors of the debtor and subsidiary debtors involving very large property rights as is fully shown in the table Appendix D, there is only one class of creditors appealing and objecting to the allocations and basic structure of the Plan. It is unlikely that all the other creditors are entirely satisfied with it as the claims of only one of the classes, the New Orleans First Mortgage Bonds, are to be satisfied in full in cash or its equivalent. All the rest must submit to substantial adjustments. But with the one exception they have all acquiesced in the valuations and the allocations. None of the preceding plans of reorganization received such general measure of acceptance by creditors.

The one class of creditors so objecting and appealing comprises the owners of the bonds issued by the debtor designated in the table Secured Serial 5¼ Bonds which were issued by Missouri Pacific and secured by pledge of about 82 per cent of the capital stock of the subsidiary debtor, the New Orleans company. Those who speak for this class of creditors join in contentions made for the late Mr. John Speed Elliott and with others owning some of the Serial bonds and owning and speaking for owners of some unpledged publicly owned shares of such capital stock. They object to the treatment accorded by the Plan to the New Orleans capital stock in that they claim the Commission valued that stock too low and allocated insufficient securities of the new company in respect of it.

The Missouri Pacific bought all but a small per cent of the capital stock of the New Orleans pursuant to authority granted by the Interstate Commerce Commission in 1924, after investigation and determination that the purchase was in the public interest (Control of Gulf Coast Lines by M.P.R.R., 94 I.C.C. 191), and the Gulf Coast Lines have been operated as part of the system ever since though retaining their separate corporate structures. In purchasing the stock the Missouri Pacific originally issued its 7% Sinking Fund Notes and in 1926 it issued the 5¼% Secured Serial Bonds to take up the notes. $13,156,000 of these bonds were issued to public investors, and 131,560 shares of the stock or ten shares for each $1,000 bond were pledged as security. At bankruptcy $12,140,000 of the Serials were publicly outstanding secured by the pledge of 121,460 or 121,400 shares (82%) of the stock. The Trustee in Reorganization bought up some of the bonds during the proceedings so that at present only $10,425,000 of them are publicly outstanding. With interest, they amount at the Plan's effective date, January 1, 1948, to $18,680,297.

The holders of the Serial bonds secured by the stock and the owners of the unpledged stock have been accorded a position in the Plan which the Commission thought was far superior to that of any other junior interest. The...