Boston and Maine Corp. v. First Nat. Bank of Boston

Decision Date13 March 1980
Docket NumberNo. 79-1368,79-1368
Citation618 F.2d 137
PartiesIn the Matter of BOSTON AND MAINE CORPORATION, Debtor, v. The FIRST NATIONAL BANK OF BOSTON et al., Appellants.
CourtU.S. Court of Appeals — First Circuit

Edward T. Robinson, Boston, Mass., with whom Thomas I. Elkind, Gaston Snow & Ely Bartlett, and Joseph H. B. Edwards, Bingham, Dana & Gould, Boston, Mass., were on brief, for appellant.

Robert M. Gargill, Boston, Mass., with whom Zdislaw W. Wieckowski, Choate, Hall & Stewart, and Charles W. Mulcahy, Jr., Boston, Mass., were on brief for appellees Trustees of The Boston and Maine Corporation, debtor.

Joseph D. S. Hinkley, Linda D. Chase and Peabody & Arnold, Boston, Mass., on brief for appellees State Street Bank and Trust Company et al.

Before COFFIN, Chief Judge, BOWNES, Circuit Judge, CLARKE, * District Judge.

BOWNES, Circuit Judge.

This appeal focuses on another chapter 1 in the continuing effort to reorganize the Boston and Maine Corporation. This one involves the reduction of corporate debt through the purchase of first mortgage bonds. The issues presented are: (1) whether the district court supervising the reorganization (the Reorganization Court) abused its discretion in dismissing bondholders' petitions requesting payment of interest 2 on all first mortgage bonds for the twelve to fifteen months of delay in approval of the bond tender offer caused by the assertion of Interstate Commerce Commission jurisdiction over the tender offer, and (2) whether the Reorganization Court made adequate findings of fact and conclusions of law in dismissing the petitions.

Reorganization of the Boston and Maine Corporation (the Railroad) was initiated in 1970 by the filing and acceptance of involuntary petitions pursuant to section 77 of the Bankruptcy Act, 11 U.S.C. § 205. Following the appointment of Reorganization Trustees (the Trustees), the Trustees developed a two-step plan for the resuscitation of the Railroad. Step one called for the sale of certain commuter lines and other real estate and the deposit of the proceeds in a Reserve Fund which would be subject to the same liens to which the real estate had been subject. Step two called for the use of the monies in the Reserve Fund to satisfy a portion of the bonded indebtedness of the Railroad and thereby to permit a reorganization of its capital structure on a 100% equity basis. Despite the fact that the Railroad's failure to show a probability of profitable operation has precluded formal adoption of the plan, 3 the Trustees have proceeded with its implementation. With the approval of the Interstate Commerce Commission (the Commission) and the Reorganization Court, the commuter lines and real estate were sold, creating a Reserve Fund balance of $52,400,000 as of June 30, 1977.

By petition filed in April and amended in July of 1977, the Trustees initiated step two of the plan, requesting authority from the Reorganization Court to make a tender offer of $850 per $1,000 par value of the first mortgage bonds (the bonds) and to draw down the Reserve Fund by up to $32,000,000 to finance the tender offer. On October 27, 1977, the Commission notified the Reorganization Court that, because the tender offer was integral to the reorganization, it had primary jurisdiction over the petition. The Commission referred the petition to an Administrative Law Judge who approved a tender offer of $800 per $1,000 par value of the bonds and a maximum draw down of the Reserve Fund of $20,500,000. On June 23, 1978, the Commission adopted the $800 tender offer limitation, but increased the maximum Reserve Fund draw down to $33,060,000. Boston and Maine Corporation-Tender Offer, 354 I.C.C. 621 (1978).

At the November 15, 1978, Reorganization Court hearing on the petition, The Madison Fund, Inc. (Madison), holders of $10,300,000 in bonds, urged for the first time that at least one year's interest be paid to compensate bondholders for the delay in approval of the tender offer. In its March 19, 1979, Memorandum finally approving the tender offer, the Reorganization Court described the request as "appealing," but denied the request without prejudice because it had not been noticed to and briefed by all parties in interest. In re Boston and Maine Corp., 468 F.Supp. 1010, 1015 (D.Mass.1979).

On March 26, 1979, Madison petitioned the Reorganization Court for payment of six percent interest for fifteen months on all first mortgage bonds, whether tendered or not. The next day, the First Mortgage Indenture Trustees, holders of the mortgage securing the approximately $46,600,000 in bonds, filed a similar petition requesting payment of interest for twelve months. If approved, the petitions would have required payment of approximately $3,500,000 and $2,800,000 respectively. The petitions were opposed by the Trustees, the Second Mortgage Indenture Trustees, the Commonwealth of Massachusetts, the City of Cambridge, Massachusetts, and a number of railroads which were creditors of the Railroad.

After hearing argument and considering a stipulation of facts entered into by most of the parties, the Reorganization Court dismissed the petitions. In its decision, the Reorganization Court noted the instability of earnings experienced by the Railroad, the business judgment of the Trustees that payment of interest would not be in the best interests of the Railroad, the potential for disruption of the established pattern of settlement of priority property tax claims and the possibility that a reordering of priorities pursuant to pending litigation would further deplete the Reserve Fund.

The Jurisdictional Issue

We deal first with appellee's contention that the Reorganization Court should have referred the interest petitions to the Commission for consideration as it did with the tender offer petition and that jurisdictional constraints require that we remand for such action. The Reorganization Court declined to reach this issue, effectively ruling that, even if the petitions were referred to and approved by the Commission, the Reorganization Court would not approve the petition. We find no error in the Reorganization Court's resolution of this issue and rule that the complimentary jurisdiction of the Commission over reorganization matters is no bar to this appeal.

As we have noted in the past, "(t)he twin objects of § 77 are to conserve the debtor's assets for the benefit of all creditors and to preserve the ongoing railroad in the interest of the public." In re Boston and Maine Corp., 484 F.2d 369, 374 (1st Cir. 1973). To guarantee achievement of these objectives, Congress has apportioned responsibility for the management and reorganization of insolvent railroads among three entities: the Commission, the Reorganization Court and the Reorganization Trustees. Under this scheme, the Trustee is given "all the powers of a trustee in bankruptcy, including the power to operate the business of the debtor railroad, 'subject to the control of the judge and the jurisdiction of the Commission'." In re Boston and Maine Corp., 600 F.2d 307, 309 (1st Cir. 1979). The Reorganization Court "establishes the rights and priorities of creditors presenting claims against the estate and determines when those claims shall be paid." Id. at 310. Finally, the Commission, the one partner in the reorganization expert in rail transportation matters, has "primary responsibility for the development of a suitable plan . . . subject to a degree of participation by the court." Ecker v. Western Pac. R. Corp., 318 U.S. 448, 468, 63 S.Ct. 692, 705, 87 L.Ed. 892 (1943); In re Boston and Maine Corp., 484 F.2d at 372. In this instance, the petition requested payment of money to past and present creditors of the debtor, a matter clearly within the province of the Reorganization Court. Referral to the Commission was required only if two conditions were met: (1) the Reorganization Court approved the payment, and (2) the payment was integral to the reorganization plan, see In re Penn Central Transportation Co., 358 F.Supp. 154 (E.D.Pa.1973). Since the Reorganization Court disapproved of the payment, there was no need to determine whether the payment was integral to the reorganization.

Abuse of Discretion

There is no doubt that a Reorganization Court may, "in the exercise of a sound discretion, authorize the payment of matured interest or its equivalent to mortgage bondholders out of available funds earned by the property constituting the security for their bonds." Missouri Pac. R. Co. 51/4% Secured S. B. C. v. Thompson, 194 F.2d 799, 802 (8th Cir. 1952). Accord, Central Hanover Bank & Trust Co. v. Callaway, 135 F.2d 592 (5th Cir. 1943); In re Wisconsin Cent. R. Co., 72 F.Supp. 669 (D.Minn.1946). Although payment of the interest requested by petitioners may, if appellees are correct, restrict the ability of the Trustees to operate the Railroad and diminish the likelihood of the satisfaction of all creditors by the Reorganization Court, there is no question that the Reserve Fund contains sufficient monies to pay the requested interest. However, payment of interest is not compelled, under any circumstances, by law or by decision of the Commission.

The petition requesting authorization of the tender offer specifically provided for a "flat" tender offer, that is, without interest. The tender offer approved by the Administrative Law Judge and adopted by the Commission also specifically provided for a "flat" tender offer. Moreover, the Plan of Reorganization contains no provision for payment of any interest claim in cash; rather, it provides for the payment of the interest claims of first mortgage bondholders by the issuance of stock. Accordingly, the Reorganization Court properly viewed the interest petitions as "addressed to its discretion."

In reviewing the exercise of the Reorganization Court's discretion, we use the standard articulated by the Supreme Court:

It is not for us to pass upon the myriad...

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