Reconstruction Finance Corporation v. Denver Co Same v. Denver Co Same v. City Bank Farmers Trust Co Same v. Thompson 282

• Decision Date: 10 June 1946
• Docket Number: Nos. 278,s. 278
• Citation: 90 L.Ed. 1400,328 U.S. 495,329 U.S. 679,66 S.Ct. 1384
• Parties: RECONSTRUCTION FINANCE CORPORATION et al. v. DENVER & R.G.W.R. CO. et al. (two cases). SAME v. DENVER & S.L.W.R. CO. et al. SAME v. CITY BANK FARMERS TRUST CO. SAME v. THOMPSON. to 282
• Court: U.S. Supreme Court

328 U.S. 495

66 S.Ct. 1384

329 U.S. 679

90 L.Ed. 1400

RECONSTRUCTION FINANCE CORPORATION et al.

v DENVER & R.G.W.R. CO. et al. (two cases).

SAME

v. DENVER & S.L.W.R. CO. et al.

SAME

v. CITY BANK FARMERS TRUST CO.

SAME

v. THOMPSON.

Nos. 278 to 282.

Supreme Court of the United States

Argued and Submitted March 5, 6, 1946.

Decided June 10, 1946.

Dissenting Opinion Oct. 28, 1946.

Mr. Justice FRANKFURTER, dissenting.

On 911, Aug. 27, 1935, 11 U.S.C. § 205, 11 U.S.C.A. § 205. The plan of reor-

[Argument of Counsel from pages 495-499 intentionally omitted] Mr. George D. Gibson, of Richmond, Va., for petitioners.

Mr. Edward E. Watts, Jr., of New York City, for respondent City Bank Farmers Trust Co.

Mr. Frank C. Nicodemus, Jr., of New York City, for respondent Denver & R.G.W.R. Co.

Mr. H. H. Larimore, of St. Louis, Mo., for respondent Guy A. Thompson, trustee, of Missouri Pac. Ry. Co.

Mr. Justice REED delivered the opinion of the Court.

The petitioners in these five cases are the owners of claims against the debtor, Denver & Rio Grad e Western Railroad Company, or against secondary debtor, the Denver & Salt Lake Western Railroad Company. The respondents are the two debtors just named; City Bank Farmers Trust Company, Trustee under the General Mortgage of the principal debtor; and the Trustee of the Missouri Pacific Railroad Company, a large owner of common stock of the principal debtor.

The debtors sought reorganization in the District Court of the United States for the District of Colorado under Section 77 of the Bankruptcy Act,¹ on November 1, 1935. The Interstate Commerce Commission approved the plan of reorganization under consideration in this review on June 14, 1943.² The District Court approved the plan October 25, 1943.³ It was then submitted by the Commission to the creditors of the classes deemed entitled to vote for acceptance or rejection of the plan and a certificate of the result filed in the District Court on July 15, 1944. All classes of voting creditors approved the plan as required by Section 77 except the holders of the Denver's General Mortgage bonds.⁴ On November 1, the District Court held the rejection of the plan by the holders of the General Mortgage was not reasonably justified⁵ and thereafter confirmed the plan on November 29, 1944. Section 77, sub. e.

The plan provided for a reorganization as of January 1, 1943, by the Denver by adjustment of its liabilities to its assets with or without a consolidation with the Salt Lake and the Salt Lake Western to form a system. The stock of the latter road is held by the Denver. There are no bonds. As no ruling that we are asked or required to make turns upon whether the reorganization is with or without the suggested consolidation, we need not give further consideration to possible differences. In either case, creditors with secured claims against the reorganized roads or against their property were left undisturbed or allocated new securities of the new company, consisting of first mortgage and income bonds, preferred and common stock, in lots, in face amount of the secured claims except for the General Mortgage issue, that the Commission and District Court determined, through adoption of the plan, were fair and equitable in the light of the respective priorities, liens and collateral of the various secured claims. All of the securities were given a par value. Interest partly fixed and interest partly contingent on earnings was used to gain play in annual charges. The plan eliminated unsecured claims and allocated common stock in face amount of ten per cent of their claim to General Mortgage bonds of the debtor. Its stockholders received nothing. It was determined that the aggregate of the securities in the plan represented the value of the properties for reorganization purposes and that through prospective earnings there was adequate coverage for the charges.⁶

Respondents sought review in separate appeals from the order of approval or the order of confirmation or both to the Circuit Court of Appeals for the Tenth Circuit. That court reversed the District Court on all appeals and remanded the reorganization proceedings to the Interstate Commerce Commission for further consideration with the statement, 150 F.2d 28, 40,

'Nothing in this opinion shall prejudice or foreclose the rights of the parties to propose a new plan of reorganization or the power of the Commission to formulate, approve, and certify a new plan of reorganization in the light of any relevant facts presented to the Commission in any proceeding under 11 U.S.C. Sec. 205(d)( 11 U.S.C.A. § 205, sub. d).'

DISTRIBUTION OF NEW SECURITIES PER $1,000 OF PRESENT BONDS

WITH ACCRUED INTEREST

First-

mortage Income Preferred Common

bonds bonds stock stock

Rio Grande Western first trusts ($15,190,000) $ 970.20 $349.80 --------- ---------

Rio Grande Western consolidated's ($15,080,000) --------- 266.00 $970.90 $ 93.10

Junction firsts ($2,000,000) 1,061.96 317.21 By this remand, the Commission was empowered to proceed anew to consideration of the reorganization in all its phases, § 77, sub. e, including those steps previously taken and approved by the opinion of the Circuit Court of Appeals.

That court approved the valuation of the debtor reached mainly by the use of present and prospective earnings. It held that the valuation adopted need not reflect necessarily the money spent for improvements during the trusteeship for reorganization. 150 F.2d at page 35. The soundness of these conclusions is fully supported by the Western Pacific and Milwaukee cases.⁷ The Circuit Court further held that the Commission was justified in refusing to reopen the hearings just before the entry of its order of June 14, 1943, approving the plan, to hear evidence of the then existing economic conditions and the 1943 earnings of the debtor.⁸

The reversal came from the Circuit Court's holding, contrary to the Commission and the District Court, that free cash in excess of operating capital needs and large earnings from war business after the date of the plan should be for the benefit of the General bondholders. 150 F.2d at pages 35-38. That court further held that decreases in debt by cash payments, with the consequent reduction of securities that were required to be issued under the plan to cover such debt claims, should inure to the benefit of the same General bondholders. 150 F.2d at pages 38, 39. The Circuit Court disagreed also with the treatment of certain collateral deposited behind the First Consolidated Mortgage of the Rio Grande Western Railway Company and secondarily behind other issues of the debtor. This is the Utah Fuel stock issue hereinafter discussed. These differences from the conclusions of the District Court led the Circuit Court to hold that the General bondholders were 'reasonably justified' in rejecting the plan and that the District Court was without authority to confirm the plan over their veto. § 77, sub. e.

Petitioners on July 30, 1945, sought a writ of certiorari to reverse these rulings of the Circuit Court and, on account of the importance of the issues in the administration of railroad reorganization under Section 77, we granted their petition on October 8, 1945. 326 U.S. 699, 66 S.Ct. 50, 51.

The briefs of all the parties here restate the questions presented in the petition for certiorari according to the emphasis the particular party places upon points of controversy. After a general consideration of the background of the plan and respondents' contentions to support the judgment besides the defenses applicable to petitioners' certiorari, we shall give attention to each of the just stated disagreements between the district and appellate court. This will cover the points under review.

The basic problems of railroad reorganization under Section 77 of the Bankruptcy Act have been so recently considered by this Court in the Western Pacific and Milwaukee cases that only a summary reference to their conclusions attacked by respondents need be made now. No new enactments have changed the law since those decisions on March 15, 1943. The complexities of the reorganization of a railroad with responsibility to the public and obligations to its security holders were recognized. The impossibility without destruction of efficiency and values of reversing the process of integration to restore the parts that now make up the whole of a system of their original operational function was understood. The various bond issues with different and often overlapping liens, with competing claims for allocation of earnings pending reorganization, presented hard problems for legislativ solution. A fair, administratively practical and lasting method was sought. By provisions for adjustment of creditors' claims, Congress intended to avoid the delays, costs and sacrifices of liquidation.⁹ The agencies em- ployed by Congress to accomplish reorganizations under Section 77 were the Interstate Commerce Commission and the courts. The answer reached by Congress was that the experience and judgment of the Commission must be relied upon for final determinations of value and of matters affecting the public interest, subject to judicial review to assure compliance with Constitutional and statutory requirements. This was the interpretation of all mem- bers of this Court from the language of the act and the evidence of Congressional purpose in the hearings, reports and discussion.¹⁰ To the courts, Congress confided the power to review the plan to determine whether the Commission has followed the statutory mandates of subsection (e), 318 U.S. at page 477, 63 S.Ct. at page 709, 87 L.Ed. 892, and whether the Commission had material evidence to support its conclusions. 318 U.S. at page 477, concurring opinion at page 512, 63 S.Ct. at page 709, concurring opinion at page 725, 87 L.Ed. 892.

At this point, we restate our conclusion reached in the former cases that the Congressional authority to the Commission to...